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Creating a Budget

by Bret Hartman

Most people think that budgeting is only important for young people. But budgeting should play a role in your life whether you are a young adult, middle aged or even entering retirement.

If you’ve never created a budget before you shouldn’t expect to match your budget down to the last dollar. Trial and error is a key first step in making an accurate and sustainable budget. My recommendation would be to experiment for up to three months. This means keep track of every dollar that leaves your bank account over that time period. Monthly budgeting isn’t necessary for those who have been budgeting for years, but it is a good way for beginners to learn quickly and see their mistakes. Remember to include all expenses, from a car payment to buying a candy bar. My advice is to use an excel spreadsheet and classify your expenses into categories such as car payments, loan payments, groceries, etc. After three months, look at your expenses and average them so you can budget moving forward.

It is very easy to forget about budgeting for certain categories, such as lump sum expenses. Lump sum expenses can include paying car insurance up-front or perhaps you have a large car expense (new tires, fender bender etc.).

For example, let’s say you are in a car accident (don’t worry, everyone involved is fine!). You wouldn’t want to expense that over one month. Instead, create a category such as “Unexpected Expenses” and budget for this monthly. Let’s say this accident will cost you $500 out-of-pocket, and later in the year you break a tooth cap, which will run you $600. There’s $1,100 of expenses you weren’t expecting. Most of us can’t go a full year without some unexpected expense happening to us. So in order to have an accurate budget, everyone should factor in these expenses. A single person who budgets conservatively may budget $1,500 a year on this, which comes out to $125 a month. Every person is different, but it is important to budget for the unexpected.

Let’s discuss one final issue: savings. Savings is one of the biggest budgeting mistakes individuals make. Always include savings in your budget. It is not a good idea to just use your surplus and use that for savings. The best advice I can give you is that once you find a comfortable number, stick to it. Make adjustments in your other categories and if you need to cut down your budget, do not cut savings. It is very easy to just adjust your savings category (as you receive no immediate benefit from it) but this category is vital to your long-term financial future.

Below, find a sample budget that is a great starting point to managing your daily finances.

Sample Budget: $40,000 Salary
After Tax Pay $29,500

Rent $600.00
Groceries (food, drink) $300.00
Savings (401k contr., IRA, etc.) $250.00
Car Payment $200.00
Gasoline $175.00
Loan Payments $150.00
Unexpected Expenses $100.00
Utilities (electric, water) $100.00
Internet & TV $100.00
Eating Out $100.00
Cell Phone $75.00
Car Insurance $75.00
Vacation $75.00
Hobbies $75.00
Toiletries $40.00
Concerts/Sporting Events $40.00
Clothing $25.00
Gym Membership $20.00 Monthly Gross Income
Total $2,500.00 $2,500.00

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