10. Step 5: Budget
Create a budget
A budget is a tool you will use to make financial decisions. This section will describe a budget and how to create one using the three following steps:
- Answer the question, “What are income and expense records and why do I need them?”
- Develop a balanced personal budget showing expected income and expenses, which include expenditures for both insurance and savings.
- Plan how to allocate and readjust—as needed—a monthly income between spending and savings.
1. What are income and expense records? Why do I need them?
When you need to make financial decisions, having a budget will make your job much easier. The first step in creating a budget is to find out what income you now have coming in and where that money is going—where am I spending it? Henry already did this. A budget is a spending plan that includes how much money you plan to make (income) and how much money you plan to spend (expenses). The goal is to have income exceed expenses. You can then move the extra money into the saving line in your budget for things you want and need and increase the amount you are “paying yourself first.” Henry worked his way through those steps.
2. Develop a balanced personal budget showing expected income and expenses, including savings.
Let’s transfer all that work from his Income and Expense records to a planning document—a budget sheet. Typically, budgets are calculated on a monthly basis, but you need to take into account bills that don’t come every month. (This is also why we told you to average the leather coat over 12 months before.) For example, your car insurance bill may be for three months, six months, or even a year, so divide the total by three, six, or 12. The format of the budget sheet is really the Income and Expense reports with an added column called “Budget.” What you are doing is looking at what income and expenses you currently have (the ACTUAL column) and changing any line amounts to what you plan to spend or earn from now on (the BUDGET column). For Henry’s example, the ACTUAL column figures are those Henry compiled on the original Income and Expense worksheets. The BUDGET column figures include the changes Henry decided to take.
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