Basic Budgeting

Is budget a dirty word? Most people think so. But everybody uses the money they receive. They spend it, save it, give it away, or invest it. When you budget, you are just planning how you will use your money before you actually use it.

There are four basic steps to budgeting: planning, record keeping, summarizing, and evaluating. In the beginning, keep these four steps simple. As you become more experienced, you will be able to consider your financial matters in greater detail.

The first step is planning. To plan, you must know two things: how much money you will earn and how much you will spend. For most of us, determining our income is easy. We know how much, when, and how often we are paid. A few simple calculations will determine how much money we will actually receive.

To determine how much you will spend, list your expenses by item and amount. Remember to include obligations such as utilities, gas, and other items that you use regularly but for which you do not receive a regular bill. When that list is completed, add all of the discretionary items that you need or want and their cost.

Now prioritize your bills, obligations, wants, and needs. Once the decision is made as to which items are most important, you just need to follow your plan.

The second step is record keeping. Keep track of how you actually spend your money. It is only through record keeping that you can determine how well your budget is working. The records can be kept in any manner that is convenient. Some people carry around a little notebook in which to record all purchases and expenses. Others pay for everything with checks or credit cards and use the check stubs and credit card bills as their record. Still others keep the receipts of every purchase.

The third step is summarizing. You will gather the records of your actual expenses and total the results by category. You should be able to determine the total expense for groceries, gas, clothing, entertainment, and so forth from your records.

The final step is evaluating. Compare your actual expenses with your planned expenses. If there is a difference between the actual and budgeted amount, you will need to determine the reason. Perhaps you budgeted too much or too little. Perhaps you lost control and overspent in a certain category. Perhaps an expected bill was delayed. Perhaps there was an unexpected expense.

With the understanding that comes from your evaluation, you are now ready to prepare your next budget. Budgeting is done in cycles. A budget cycle occurs each time you complete the four budgeting steps. Since many bills are paid monthly, you may plan a month’s budget at a time; or you may prefer to work with a quarterly or even yearly budget. In any case, after you have gone through a complete budget cycle you will be able to adjust your new budget based on your actual experience. Each budget will be a little better than the last one. As you learn and become more experienced, your increased skill will allow you to meet more of your financial goals.—Vaughn Cox, Sandy, Utah