Build A Budget

Build a budget

Manage your money better with a budget.

Building a budget is the first step toward becoming a better money manager. Believe it or not, many people don’t know how much money they earn or how much they spend each month.

That’s why we create budgets. It’s a financial exercise that sometimes surprises people – even shocks them when they discover the amount they spend each month. It also inspires them to change their financial habits.

Don’t be nonchalant about this exercise. Figure out the total amount you earn and spend each month. Drill down to the last dollar. It’s important.

KOFE Break!

Before we get started, take this quick quiz to see how much you know about the basics of budgeting. It will help gauge the amount of time you’ll need to take on this section.

What are the three types of expenses you can have in your budget?

A. Bills, Wants, Needs

B. Fixed, Flexible, Discretionary

C. Pay now, Pay next month, Pay never

D. Flexible, Floating, Fixed

How much money should you have in savings, at a minimum?

A. What savings?

B. At least six months of budgeting expenses

C. At least 50% of your yearly net salary

D. At least 75% of your gross monthly income

Calculating your income

Find a quiet spot and gather all sources of income. If you’re married, include your spouse’s wages. You want to report your net income, which is the income you take home from each paycheck. Net income is your wages minus taxes, retirement contributions, employer-sponsored healthcare costs.

If you earn money through investments, have a part-time job, receive alimony, have kids that contribute to the family bills, add it all in. Remember, include everything to maintain an accurate budget. Make sure to report the income you receive and not the income you expect to receive. For example, if you are supposed to receive child support, but do not receive payments regularly, do not include this in your income.

Track your spending

Once you understand how much you earn each month, it’s time to track your spending. For one month, collect all your receipts, including ATM, restaurant, gas and miscellaneous receipts. Write everything down.

Every cent counts. Don’t forget to include expenses that are easily forgotten such as:

  • Allowance for the kids
  • Money spent on morning coffee or afternoon energy drinks
  • The quick lunch at a fast food restaurant
  • Dry cleaning
  • Alcohol and cigarettes

No expense is too small. By the way, this is where many people conveniently ignore certain expenses. It may be because they feel uncomfortable about excessive spending or want the spending to remain private. If you want an accurate budget, track everything.

Understanding the three types of expenses in your budget

You’ll discover three types of expenses in your spending log worksheet. This separation reveals where your money is being spent and pinpoints the areas where you can cut spending if necessary. The three types include:

Fixed

These are usually necessary expenses and remain fixed from month-to-month. They include car payments, mortgage, rent and even expenses such as HOA fees.

Flexible

These expenses change from month-to-month but are mostly necessary – although you can easily lower them. They include grocery bills, utilities, cable and cell phone bills.

Discretionary

Items you don’t necessarily need to survive, but still buy them anyway because you want them. These include gym memberships, dining out, morning coffee and more. They may also include unexpected costs, such as home repairs.

KOFE Break!

What does the financial term “upside down” mean?

A. You’re not right side up

B. Your gross income is more than your total expenses

C. Your total expenses are more than your gross income

D. Your finances are in perfect shape

Once you build a budget, what should you do after a few months?

A. Stop using the budget

B. Build a whole new budget

C. Try using someone else’s budget

D. Check to make sure it’s still accurate

Learning how to balance your budget

After you total your monthly expenses, simply subtract them from your total net income. The money remaining is called free cash flow. This is money you can use to cover unexpected monthly expenses, build your emergency fund, or pay off additional debt.

For example, if you have a total net income of $2,000 and your expenses are $1,500, then your monthly free cash flow is $500 ($2,000 – $1,500 = $500).

Upside down

Upside down refers to the situation people find themselves in when they spend more than they earn. If your total expenses are more than your gross income, you’re upside down. That’s trouble.

Before you go any further, learn how to Reduce Your Expenses.

Don’t forget to budget in savings

Most people forget to create an entry for savings in their budget. You should set aside a minimum of six months of budgeted living expenses in a separate savings account.

Figure out how much money you can save each month and set up an account that automatically takes that money from your check. It’s quick and painless. Otherwise, there’s a good chance you’ll end up with no savings.

Remember to re-evaluate

After a few months of budgeting, compare your actual spending with what you budgeted. If some expenses have increased, make the adjustments. Your budget is never set in stone.

After every month or two, you should re-evaluate it. Expenses change quickly, and if you’re not diligent about adjusting them, the budget won’t be accurate. Budgeting takes some work, but in the end, you’ll get the rewards.

Take advantage of KOFE’s interactive courses on budgeting, as well as their financial publications and videos.