Budgeting Your Personal Finances

budgetHow are you budgeting your finances? Good money management starts with knowing where your money goes. Many Americans spend more than they make, so to ensure you don’t fall in that category, establish a personal or household budget. A budgeting plan allows you to organize your spending: you can see what available resources you have and how you disburse those resources each week or month. A budget should highlight the expense areas in which you may be overspending. There are several types of expenses:

“Fixed” expenses include mortgage payment, car payment, and maintenance costs such as gas and electricity.

“Committed” expenses are not absolute necessities, but they are regular expenses to which you’ve made a commitment such as music lessons, summer camps and sports activities for the children.

“Oops” expenses are accident expenses that can drain a budget, such as repairing a leaky roof, replacing a faulty air conditioner or heater, or having to pay unexpected medical bills.

“Luxury” expenses cover those activities you want to do: dining out, going to the movies, vacations, new home theatre system and holiday gift buying, to name a few.

In order to prepare a simple budgeting plan, you need to incorporate all of these expenses. Here is a possible scenario for a budget based on a take-home salary of $50,000:

Expense Monthly Cost Annual Cost
Mortgage $1,200 / month $14,400 / year
Car Payment $400 / month $4,800 / year
Gasoline (one car) $200 / month $2,400 / year
Household Expenses / utilities $900 / month $10,800 / year
Entertainment $300 / month $3,600 / year
Children's Expenses (2x) $300 / month $7,200 / year
Discretionary spending charity/savings $5,000 / year

That gives you a grand total of $48,200 in expenses. Subtract that amount from your total take home pay, and that leaves you with $1,800 for the year, or approximately $150 per month for unexpected emergencies or needs. It’s recommended that you have three to six months of salary saved in an emergency fund for unexpected income loss. Therefore, you may need to find ways to trim your expenses if you have not built up that emergency fund.

In order to prevent overspending, you need to keep track of your budgeting by following, and periodically reviewing, your personal finance plan.