What is a personal budget? Essentially, a budget is a projection of how we are going to spend our money. B
udgets are usually based on monthly income and expenses; some people track weekly, some daily, but unfortunately, most of us simply do not budget at all. A budget works when at the end of the month, we have spent only the amount of money that we have earned, or better yet, when there is an amount of money left over. So, how do you create a personal budget?
The first step is to list every monthly expense that is unavoidable – that is, even if you had no money coming in, the expense would still be incurred. Examples include, rent or mortgage payments, gasoline to get to and from work and utility payments. Do not include groceries because, even though we have to buy groceries, we have some control over how much we spend. This is not true of our rent or mortgage.
The next step is to then subtract the unavoidable (sometimes called “Fixed Expenses”) from your total regular monthly income. It is important to make sure that you are making your calculations using your base income only – it is not a good practice to include overtime or extra income that you may earn by doing odd jobs for example. Why? It’s pretty simple – your budget then becomes dependent on your having to do odd jobs and work overtime to make your budget work. What happens then if there is no overtime to work, or no odd jobs to do? You guessed it – your budget won’t work, and you’ll end up in the red at the end of the month. Subtracting our fixed expenses from our “real” monthly income leaves us with the amount of money that is remaining to pay for all of the expenses over which we have some degree of control. Examples include groceries, snacks, restaurants and clothing. If after subtracting these items, there is money left over, then there is money available for items such as more features on your cell phone or saving for a trip to Bermuda. Ideally, you would also allocate an amount for savings first – some suggest 10% of your income.
A budget is a place to start, but for some of us budgets are very hard to stick to. Why? In my opinion, and my experience, the answer is sometimes not that complicated. We all know that “Murphy’s Law” creates unexpected expenses, such as vet bills and house repairs, but sometimes we simply want more than we can really afford; this causes us to rely on credit to get the things we want. If we “want more” too often, the minimum payments can exceed our budgets, and soon we end up struggling to make our payments. So, the trick is to insure that we try our best to live within our budgets. Even so, a budget cannot help us in situations where our base income has been affected by uncontrolled events like illness, separation or job lay-off. If you are having trouble balancing your budget, we may be able to help. Call us at 310-PLAN for a free consultation; learn more about bankruptcy and consumer proposals or visit us at www.hoyes.com.
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