Tired of getting squeezed at the end of each month? Tired of counting your pennies and looking at the balance of your bank account on a daily basis? One of the very first steps to control your personal finance is to establish your budget. What is the coolest thing about a budget? It is that it allows you to see things coming in ahead of time and helps you plan for how you are going to finance your expenses.
While you can use sophisticated budget tools like Microsoft Money or YNAB (You Need A Budget), a simple sheet of paper, a pencil and a calculator can do it just fine if you are starting your first budget. However, there are 3 basics rules to follow when writing down your budget:
#1 Start with a balance sheet first
Before knowing how much you make per month or how much you spend, you should know what assets you own and what debts you owe.
When considering your assets, put aside all your furniture, electronics and car (unless you have loans attached to them). They don’t really count as assets as their values will depreciate a great deal over time and you will always need a couch to look at your TV ;-). Concentrate on bank accounts, emergency funds, investments and real estate properties.
As for debts, this is much easier. List your credit cards, line of credit, student loans, mortgage, etc. Also, put the interest rates and the monthly payments beside each one. This will help you later on.
#2 See what is coming over the next 12 months
Knowing your day-to-day expenses is quite simple; every month you eat, pay rent, and pay down debt. However, the problems for most budgets doesn’t come from the monthly exercise of balancing income and expenses, it comes from all those little unpredictable expenses showing up from time to time.
You have an old car? You should budget a monthly amount saved toward a general emergency fund or a car repair/maintenance fund. Look at the gifts you will buy this year, are you going to a wedding? A baby shower? How can you handle Christmas gifts besides putting them on your credit card?
By planning ahead for what is coming, you will be able to save enough in order to get by and your credit card won’t be used as an (expensive) emergency fund!
#3 Set budget goals, set priorities
The first 2 steps prior to establishing your budget will help you arrive at step #3: setting budgeting goals. By establishing your balance sheet, you will be more aware of your net worth and conclude if you want to pay off debts or increase your assets.
I always set my budget priorities at the beginning of the year. This way, I can establish a realistic plan to make it and can follow my goals throughout the year and make any necessary adjustments.
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