Many people do not consider the importance of a budget. They indulge in spending according to their earning and do not leave room for emergencies. This usually ends up in the incurring of debts and sometimes, personal bankruptcy. A budget helps to counter these consequences.
The essential calculations in a budget are income and expenditure. The purpose of a budget is to ensure that the expenses do not exceed the income and also provide for savings for the future.
A budget needs to be documented in the form of a chart or table. This needs to be easily comprehensible and provide a quick summing up of the relevant details. The chart needs to effectively reflect the different heads of expenditure. Suggested heads are housing and utilities, entertainment, health and beauty, transportation, communication and household. These can be further subdivided as follows:
Housing and utilities
– Mortgage payment or rent
– Taxes and electricity
– Natural gas
– Water and garbage pick up
– Cable television or satellite service
– Internet acces
If you have any other expenses that are not covered, you could add them to the list.
Next, try to reflect all expenses on a monthly calculation. For example, if you pay yearly taxes, calculate the monthly expense by dividing the yearly amount by twelve. Having done this, add up all the figures to arrive at the total monthly expense figure. Then subtract this amount from your take home salary amount. If you find the remainder in negative, you need to look for expenses where you ought to cut down. For example, if your take home salary is $1000 and your expenses total to $1150, you would need to trim down $150 each month, from the expenses.
If you need to cut down on your expenses, you would be the best judge to decide where to make the changes. However, it would be prudent to cut back on the extra subscription channels of the television. If you are smoker, cut down on smoking instead. Take home cooked lunch to office instead of eating fast food. Economize on power consumption by avoiding unnecessary use of the air conditioner and heating and make less use of the phone.
Creating a budget is absolutely necessary to manage your finances and is not dependent on the size of your income. It helps to prevent overspending and personal bankruptcy, allowing you keep track of your income and expenditure.
We will discuss other practical ways to become financially free, with expert Beth Burns, on Season 1 of BIBO Weekly!