How to Create a Practical Budget

To achieve financial security, we need to have a practical budget.  We can go on vacation or buy that big screen TV that we’ve always wanted if we have a sound budget. If we want these extras and we don’t want to seriously hurt our bank account, then we must have a budget.

Believe it or not, it’s not as hard as it seems. In fact it’s really simple.

Firstly, we need to know our income.

 

The obvious starting point in designing a practical budget is to write down what we earn. Even if what you earn is less than you would like, it’s still important to be clear as to your real income so that your budget is realistic.

In designing a budget, you need to work with your take home pay. This is the amount left over after all your taxes and deductions.  This gives you a more accurate figure of what you have to work with. Later when you receive your tax refund you look upon it as a bonus.

Many people have pay checks that vary from pay to pay. Even so you can still design a practical budget. First you need to total your income for the past 3-6 months and then divide by the number of months you added up.

Now we need to talk about Fixed, and Variable Expenses.

 

Finding out my Fixed Expenses.

 

Even though we would all wish it was different we all have bills that we need to pay. Some bills such as your loan repayment will remain the same month after month. Other fixed expenses include cable bills, rent, car and home payments. However some such as your food bill, your electricity will vary from bill to bill.

The more common expenses are listed below:

 

  • Car payments,
  • Property taxes
  • Mortgage and rent
  • Car insurance
  • Loans and line of credit
  • Home Insurance

 

Now would be a good time to make a list of your fixed expenses and add them up.

Next we need to look at our Variable Expenses.

 

Putting these variable expenses into our budget can be a little difficult as not every bill is the same each month. We don’t always spend the same amount on our weekly groceries or on gasoline. The easiest way to to work out an amount for our variable expenses is use an average amount for each expense.

The best thing about our variable expenses is that they can be changed. Later on in this post we’ll see that a great way to hold on to our hard earned cash is to reduce our variable expenses.

Some of the more common variable expenses are:

 

  • Food
  • Electricity
  • Gas
  • Heating
  • Car Maintenance

 

Now have a short break from reading and list all you variable expenses. After making a list total them up.

A good way to see what money we’re spending on variable expenses is go through our recent debit and credit card purchases.

 

Now we come to non-essential expenses.

 

Some of our expenses are non-essential. Most of us have things that want but we don’t really need them. Confusing what we want with what we need often cause us problems. One way to test ourselves is when thinking about purchasing something over $50 is to ask ourselves the question –“Is this a need or a want?” If we can’t give ourselves an honest answer then maybe we should put off the decision for 24 hours.

Examples of non-essential expenses are:

 

  • Eating out
  • Excessive amounts of clothing and shoes
  • “Things” that you buy at sales
  • Items such as DVD’s, movies, magazines and books.
  • Unnecessary gift purchases
  • Video games.

Stop reading for a while and make a list of all your non-essential expenses and total them up. Then we ask ourselves two questions – “Do we need everything on the list?” and would there be anything we could leave off the and not lose our desired lifestyle.

Now find out our Total Expenses.

 

To do this we write down all our Fixed, Variable and Non-Essential expenses and total them up. This total will give us our total expenditure for the month.

This total expenditure is the minimum that we need to earn to provide us with a balanced budget. If this total is less than we earn then we need to look again at our variable and non-essential expenses such as new clothes, entertainment, etc., and find ways to lower them.

The secret, of course, is to earn MORE than we spend.

 

Naturally we would like to earn a whole lot more than what we spend. But even if the numbers are close it will be OK.

In a later post we’ll talk about ways to both cut our costs and boost our income.

 

Your comments are most welcome. Just go to the top of the post and click on the icon showing the number of posts.

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