10. Step 5: Budget
Now it’s your turn.
We hope that helping Henry through this financial planning procedure and seeing how even little changes affect the bottom line, you will be willing to use Henry as your model. Your Education Cents budget is a great place to plan and keep track of your budget .
First, gather all your past income and expense paperwork: bank statements, credit cards statements, receipts, pay stubs.
Second, begin to track your future income and expenses.
Whenever you make a payment, you assign it to its proper category. Carry a notebook with you to record those “out of pocket” expenses that are easy to forget. Do not show just an ATM withdrawal of $40, but record how that $40 was spent!
And, if you make a credit card payment, don’t just assign the total in a lump sum but break down how much you spent in different expense categories. When you make new credit card purchases, it might be best to record these expenses at the time of the purchase and record just the credit card interest when you pay your credit card bill each month. You will be amazed at how much you are paying just in interest each month!
Within a few months, you will have a very accurate picture of where your money is actually going.
Third, use your Money 101 online budget tool to find out if there is a discrepancy between your income and expenses.
Fourth, as you did when helping Henry, identify where you are spending more than you thought or think you need to. Identify where you are not spending what you should. Are you saving for the future or for emergencies? You’re not if little or no amount is showing on the “Savings” line. If you have a spouse and/or children, are you spending for life insurance or disability insurance if something happens to you as a wage earner? Involve your family in your budgeting process (or roommate if you share certain expenses). You’re not if no figures show up on those lines of the budget. Is there any amount showing up there for vacations or travel? You need fun in your life, too!
Fifth, continue to keep records of your spending and check your budget against what your actual income and expenses are. The best test of a budget is how closely your predictions come to the actual amount you spend and earn. If you are not watching expenses, especially those you can control such as eating out, all the planning in the world won’t help you reach your goals.
After you look at what you predicted for your budget and compare it to what you actually earned and spent, you may need to make some changes. Alter your spending, improve your income, or recognize you just were wrong on certain predictions.
Play with the budget figures and watch the bottom line change. Ask yourself questions: “If I changed this expenditure by this much a week, what would happen?” “If I brought in this much more income a month, what would happen?” “If I want to add to my expenses for travel or insurance or savings, what extra income would I need or how much would I have to cut out of my other expenses?”
Get in the habit of continuing to record all income and expenses on a monthly basis. By having these figures you can answer all those questions and more.