Personal Finance/Budgeting

Budgeting involves maintaining control over your expenditures. There are typically three phases that show a maturation of a control of your budget.

Defining - Defining your inflows and outflows to get an idea of your cash flow.
Setting - Setting your budget to control how much your expenses are each month.
Improving - Improving your cash flows by reducing your expenses and increasing your income.

Making a budget

Write out your total income

Include wages, salaries, rent collections, settlements, allowances, or any other source of money you get.

Write out your fixed costs

These are the expenses that come in bill form like insurance, car payments, rent or mortgage payments, or payments to any other kind of loan. Costs like these need to be paid and don't change no matter how much or little you use them. It is important to get these down first, since these payments are generally out of your control.

Write out your variable costs

After you pay your bills, you can now allocate what's left of your income to other things that need to be paid. Groceries, utility bills, and other costs within your control go here.

Sample

Monthly income

Primary employment: $1600

Fixed monthly expenses

Rent / Mortgage: $300
Car payment: $336
Phone: $55
Kirby: $50
Insurance: $80

Variable monthly expenses

Gas: $80
Cigarettes: $150

The basic budget

Budgets don't have to be painful experiences. Now that you have a set of realistic goals for all of the money you will be getting and that you have an idea of how much money you will be spending, you can start to budget effectively.

For the first month, just count the ins and outs. You can use a normal notepad for this.

Example (All amounts in US$)
August 2005 income
Income (job)	4,095
August 2005 expenses
Rent	1000
Insurances	300
Food	200
Entertainment	100
Clothes/Diapers	100
Phone	98
Train	50
Credit Card	43
Gasoline	40
Gas	34
Electricity	20
Mysteriously Vanishing Money	165
Total Expenses	2,150
Leftover cash from July	820
Leftover cash from August	520

In August, they had 820 US$ in addition to 4,095 US$ from their income for a total of 4,915 US$.

They spent 2,150 US$ and had 520 US$ left at the end of the month. They therefore saved 2,245 US$ in August.

Counting the leftover cash in your wallet allows for a precise expenses count even if you forgot to actually count an item or two. The forgotten cash will show up as Mysteriously Vanishing Money (MVM).

Savings were distributed according to the priorities set out in Chapter 1 and were as follows:

House	700
Tuition	545
Retirement	500
Car	400
Travel	100

In case of unforeseeable emergencies when expenses exceed income, they use their travel money first, then the car money and then the retirement money to pull them out of the scrape. This is not recommended. In fact, an extra savings account for emergencies should ideally be created and hold about 6 months worth of income to deal with the ups and downs of life.

Unfortunately, that is simply not possible for the family in the example above. They must therefore prioritize their needs and perhaps create a tighter budget.

The revised budget

Now that you've thought about how to cut your expenses, it's time to get to it! Some expenses of course are fixed and so cannot be easily cut. In the example below, rental fees are exorbitant but reducing them would entail moving elsewhere... Not a realistic solution. So, what can be cut? Food, ET and the phone bill look like prime targets. Another important one to hit is MVM as it usually represents items which you can do without... after all, you don't remember buying them! Utilities and gasoline are already quite low, so don't need to be taken care of. Gradual cuts may be better than taking out 50% of one item in one fell stroke and suffering through the entire month, only to face the uncontrollable urge to splurge on that item next month. Perhaps cuts of 10% a month would be easier to bear.

August 2005 income		Target budget
Income (job)	4,095	4,095
August 2005 expenses		Target budget
Rent	1,000	1,000
Insurances	300	300
Food	200	180
Entertainment	100	90
Clothes/Diapers	100	85
Phone	98	88
Train	50	50
Credit card	43	43
Gasoline	40	40
Gas	34	34
Electricity	20	20
Mysteriously vanishing money	165	150
Total expenses	2,150	2,080
Leftover cash from July	820
Leftover cash from August	520

Hey, not bad! You have shaved 70$ from your budget. That's a great start. Continue doing this every month until you feel you are living *too* cheaply and yearn for a better life. Then, loosen up a little... just a little! Just enough to feel the difference between extreme poverty and the point where you enjoy life again. So, enjoy life, but on the cheap side!