Create a personal budget to avoid financial problems

The real simplicity of budgeting is that it is simply math.  It is the money coming in less your expenses going out.  So let’s break this out;

1. Money coming in:  For most people, this is a finite sum such as pension incomes, employment income or may fluctuate with self-employment income.

2. Expenses going out: These can be broken down between fixed and variable expenses.

   a. Fixed expenses are those that come around every month like clockwork.  Examples of fixed expenses are rent, utilities, insurance, health care premiums, loan payments, and mortgage payments.  Given the predictability of these types of expenses, they are easier to budget for.  If the money coming in is not sufficient to cover the fixed expenses, then there is a problem.  One solution would be to increase money coming in with a part-time job or reducing fixed expenses by cost-sharing such as taking on a boarder to share rent and help pay for the mortgage and utilities.

b. Variable expenses are those that fluctuate with use.  Examples would be food, clothing, dining out and entertainment expenses to name a few.  With these types of expenses, an individual has a degree of control over and are typically where savings can be found.  Keeping track of variable expenses each month can identify areas of cost savings or can identify achieving the same goal but by a different path.  A review of your monthly bank statements or keeping receipts for a 30-day period for every time you spend money, no matter how small the purchase is will help identify where your money is going and can assist in identifying where potential savings may be found.

Even setting up a monthly savings plan can be considered to be a fixed expense.  Much has been written over the years of the concept of paying yourself first.  There are a couple of reasons why people have trouble with savings.  One is that they set the bar too high for their budget and then they have to use it to cover expenses. Try starting with a smaller amount, if you don’t miss it, bump it up.  Eventually, you will find the point where you cannot go higher.  Setting aside some savings will help in those moments when unexpected expenses may pop up…car repairs, house repairs.  The other issue is that we tend to pay everyone else and then there is nothing left for ourselves.

Budgeting is also more effective if you tie your budget to your financial goals.  Developing a set of such goals will help focus your budgeting efforts.

While budgeting takes discipline and a certain amount of stick-to-it-ness, the rewards will far outweigh the alternative of being overburdened by debt.