Although you probably learned the basics of how to use an Excel spreadsheet in school, and, of course, Excel is a fancy way of creating a budget, you really don’t need anything other than paper and pencil (and a calculator if you’re really bad at math). For the purposes of this budget discussion, we’ll budget on a monthly basis.
Money In
The first thing you’ll need to know to create a budget is how much money you have. Specifically, you’ll need to know how much money you have available to use every month. It’s all well and good to know how much money you earn, but because your employer may take as much as 30% of your income for taxes and other deductions, you will not have as much to spend as you actually earn. So, always use your net income for budgeting, not your gross income.
Money Out
The second thing you need to know is how much mon ey you spend. This can be very tricky because people tend to forget to include everything they spend. Expenditures you’ll need to count include bills (utilities), credit payments (credit cards), rent/mortgage, loan payments (car, student loans, personal loans), groceries, clothing, vehicle expenses (gas, repairs), entertainment, etc. Consider saving money an expense and include it in the money out column.
Money In vs. Money Out
Ideally, once you list all your net income and compare it to a list of your expenses, you’ll have more money coming in than going out. If you don’t, you’ll need to either increase your income or decrease your expenses.
Common Budgeting Mistakes
The most common, and biggest, budgeting mistakes include not listing all your expenditures and misinterpreting how much money you have to work with.
Never use your gross income to budget. Use your take-home pay. Let’s say that you earn $300.00 every week, but that your employer deducts $100.00 of that for taxes and other income deductions. That means that you actually “bring home” $200.00. Use $200.00, your take-home pay, as the basis for your budget income. Although knowing your gross income is important, it’s your net income you’ll use to budget.
Another common mistake, failing to list all expenditures, can absolutely break a budget. Sure, it’s easy to list your rent, utilities, and car payment in your budget, but don’t forget to count that latte you get every morning on your way to work and those drinks you order with friends at your weekly Friday night get together. Also count the bag of chips you snagged on your way out of the gas station, the case of beer you picked up on your way to watch the game at a friend’s house, and the bag you bought on eBay. It all counts. If you spend it, you have to include it in your budget. Be honest with yourself and list all your expenditures.
Is It In The Budget?
Here’s the hardest part about budgeting. If it isn’t in the budget, don’t buy it. It’s that simple. If your budget doesn’t have enough room in it for lunch at McDonald’s, pack a lunch instead. If that morning latte is going to break the bank, buy a travel mug and take coffee from home. Most budgets have enough wiggle room for compromise, but never spend more than you have coming in. Can’t afford that new dress? Save for it or don’t buy it.
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Budgeting
Argh! The “B” word! Few people look forward to creating a budget, and far too many people never do it, but a budget is what will give you, at a glance, a comprehensive picture of your financial situation – good or bad.
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