Having a budget is an important part of having a financial plan. Not only does it force you to keep track of your spending, but it also allows you to focus on which areas (such as loans and credit card debt) you need to pay off or pay down so you can save for retirement, education, or buying a home. While the process may seem daunting, it’s not hard to create a budget. Once you have one, most of the work will be done. You would only have to make minor changes as your spending and income habits change.
Here are some tips that can help you with your budget preparation.
#1: Learn from the Past
Before you can look into the future, you must get information about the past. You will need to look at your financial data from the last three years. You want to look for trends, patterns, and problem areas (in terms of both income and expenses). Take a close look at each line item to see if it has gone up or down in the last three years. Some expense categories are more likely to show a steady increase as prices go up, but they can be easily budgeted with an uptick in percentage. You want to look for any trends and anomalies that need to be adjusted or accounted for.
#2: Fine-Tune Your Expenses
You want to look at some of your ongoing costs (such as insurance and utility bills) because price increases can sneak up on you, but the budget preparation process can allow you to look at your regular spending habits. It will also allow you to trim down any discretionary expenses, but be sure to budget for an emergency fund.
#3: Track Your Income from a Realistic Viewpoint
To prepare a budget, you need to know how much money you’re bringing in each month. This includes regular wages, side hustles, freelance work, online sales, and other income streams. You want to focus on net income by factoring in taxes and other deductions, so you can get more accurate picture of your take-home pay.
If you budget based on gross income, you run the risk of overspending. If your income changes from month to month, you should base your budget on your lowest expected amount. This will keep you from scrambling if your income dips, and you can always adjust your budget during months when you earned more.
#4: Estimate Your Monthly Expenses
Knowing where your money is going is an important part of creating a workable budget, and it starts with categorizing your monthly expenses (which can be approached differently from person to person). List all of your fixed expenses, which are regular bills you have every month. This can include the following:
- Rent, mortgage payments, and homeowners association (HOA) fees.
- Utility expenses (such as electricity, natural gas, internet, and phone services).
- Transportation expenses (such as car payments, gas, and public transportation costs).
You also need to look at your variable expenses, which can fluctuate but can still be tracked. These expenses can include any of the following:
- Childcare of eldercare expenses.
- Insurance costs.
- Grocery expenses.
- Pet food and care.
- Clothing expenses.
- Medical and dental expenses.
- Charitable donations.
- Credit card payments.
You can also allocate funds or any of the following discretionary expenses:
- Entertainment expenses (such as dining out, movies, and hobbies).
- Subscriptions (such as streaming services and memberships).
- Savings for vacations or fun money.
It can be a good idea to use a budgeting app or spreadsheet to help you categorize and track your expenses. That way, you can get a clear picture of your spending habits.
#5: Analyze Your Cash Flow
Once you have a clear picture of all your income sources and have estimated your expenses, you will need to look at your cash flow. Start by subtracting your estimated expenses from your income and interpreting the result. A positive number will indicate a potential surplus, while a negative number will suggest a possible deficit. A zero balance means that you’re breaking even.
If you have money left over after your expenses have been paid, think about adding a new category to your budget for any of these financial opportunities:
- Opening a special purpose or club account to save for a dream vacation, new car, graduation present, or home upgrade.
- Donating to a local non-profit or community organization.
- Taking care of future medical expenses with a Health Savings Account.
- Setting up an emergency fund and building a safety net for unexpected expenses.
A Money Market Share Account is a great way to manage your emergency fund. You will need to make a minimum deposit of $1,000, but it offers a higher rate of return than a traditional savings or checking account.
If you’re looking for a CPA in Corpus Christi to help you with your budget preparation, be sure to get in touch with Jennings & Hawley.