How to Conquer Your Budget
BY: Brent Landrum
Rent! Groceries! Loans! Many young adults are surprised by the amount of financial responsibility they face when becoming independent. Understanding your income versus liabilities is important when establishing a budget that works for you and your household. Winning at this means your finances win both today and in the future.
To begin, do you know the difference between gross and net pay?
- Gross Pay: The amount of money you are paid from your employer before any deductions are taken out.
- Net Pay: The amount of money you take home after any deductions. Deductions can and/or will include taxes, insurance, and retirement contributions.
Increased income shouldn’t mean increased spending so as you climb the socioeconomic ladder, be responsible. A budget can help you take and maintain control.
Budgeting doesn’t come naturally to everyone, but everyone can benefit from sticking to one. There are several items to consider when setting your monthly allocations and it will take some organization but know that the work can pay off. We will be considering rent/mortgage, groceries, transportation, utilities, loans, and entertainment to determine what money should be spent where.
Let’s start by...
- Getting Organized
o Rent/mortgage: What do you pay? (Include renter’s or homeowner’s insurance, if applicable.)
o Groceries: Collect one month’s worth of receipts to determine an average.
o Transportation: Compile one month’s worth of gasoline expenses and any parking charges you incur.
o Utilities: Gather two months of electric, water, and other utility bills.
o Loans: Make a list of all credit card and loan payments. Write down both minimum and/or required amounts due each month.
o Entertainment: Keep track of receipts for entertainment purchases (dining out, nightlife, trips, etc.).
- Making a List
o Calculate what you have spent on the items listed above.
o When it comes to groceries, utilities, transportation, and entertainment, add all receipts up and calculate the average. As these items can change from month to month, an average can give you a general idea of what to expect.
Now, the budget...
- Allocate Funds
o Take your net income and subtract the big-ticket items, such as rent or mortgage and loans.
o Now, take the funds left and begin to look at what you have spent in the past on the remaining items, to begin allocating what you feel you can work with each month.
o Do you have money left over, or does your spending equal more than your income?
If you have more, hang tight because we'll get to what you can do with those funds.
If you don’t have enough, think about where you can cut costs and try again.
- Track Spending
o With your budget in practice, keep receipts for all spending.
o Create a spreadsheet that has placeholders for each allocation and actual amounts spent in a one-month span.
o You can adjust from month to month to reach your own financial goals.
o At the end of each quarter, calculate your total income versus your total expenditures, then look at how you did.
o No one is ever perfect with a budget, so don’t get down on yourself if you aren’t making financial headway. It takes time to master what works for you.
o Each quarter, make necessary adjustments as your goals change.
If, through your budgeting process, you find that you have excess income, consider putting it away in an emergency fund. We’ve all seen that life can change overnight, so it's best practice to have a discretionary fund, should you lose your job, have to relocate, or need to deal with any other curveball that life throws your way. This would also be a good opportunity to consider your retirement and investment strategy for the future. You may think you have all the time in the world to plan, but the sooner you start saving, the better things will be down the road.
Finally, after all this income and budgeting talk, remember to protect yourself and your needs. Ask questions and utilize the resources that are all around you – like your banker! They may not have all the answers, but chances are, they'll be able to put you in touch with the right person to talk to. Happy budgeting!