Jan. 8, 2012
How to Create a Budget - Part 1
Creating a budget is easy, creating a realistic budget is not. Most people put in an amount of what they want to spend each month for some categories not what they actually spend. This is a 2 part post on how to create a budget that will work for you. This part will cover what the categories or line items of a budget are and need to be, and this afternoon will talk about how to realistically put a figure with them.
There are 2 main categories of budget items, fixed and non-fixed. Fixed items are the same amount each month, like your rent/mortgage or your car insurance. Non-fixed items are the expenses that change each month, like gas or entertainment. There are be sub-categories within both of these categories; needs and wants. A need would be something you can't actually live without, and a want is something you enjoy having but can live without. For example, a fixed want item could be your cable bill, but it is also a want and not a need. You don't have to have cable to survive, you want cable.
The biggest and most important part of making a budget is to know and understand these categories and sub-categories. This will make sticking to your budget easier, especially if you are trying to save money or payoff debt.
There are items that may be necessary to some but not others. For example, my last job was over 20 miles from my home and in another county, so I needed a car. If I worked within biking distance or could easily take public transportation, then my car would become a want. For some families, having one car may be a necessity but having 2 is a want. Also, there are other expenses that come with this. If you have a car, you have to account not only for gas but oil changes, insurance, new tires, ect. These would all be necessities if you have a car.
Below is a list of my budget last year, and how each item falls into the above mentioned categories;
- Savings/IRA/401K - fixed & need
- Rent/Mortgage - fixed & need
- Electric - non-fixed & need
- Water/trash - fixed & need
- Prescriptions/Doctor co-pays - usually fixed & need
- Student loans/credit cards - fixed and non-fixed & need
- Phone - fixed & need (do you need a house and a cell phone or is one a want?)
- Car Note - fixed & need (again, if you don't travel much daily or live & work along a bus route this may be more of a want than a necessity)
- Car Ins - fixed & need
- Car Maintenance - fixed & need (you MUST plan for the cost of oil changes & new tires or your budget won't work when you need these)
- Gas - non-fixed & need
- Pets - fixed & need (not just food, but vet visits too)
- Food - non-fixed & need
- Internet/Cable - fixed & want
- Going out/Entertainment - non-fixed & want
Notice that I am not including taxes or insurance. Usually these are already deducted from your check before it is deposited, but if you are an independent contract or are self employed, then you would also need to add these to your budget as well.
That is what my personal budget looked like last year, not a lot of wants because I was trying to pay off my student loans several years early (paid off 4 years early in December!). In order to do that I had to take a hard look at my budget and see where I could cut costs to go towards that debt. And yes, there is a specific order to the list based on priority of each item.
Also, if you have children you will want to add a line for them for clothing and shoes. Look at your expenses, maybe you have some needs to add that I don't have or maybe you take public transportation, so you don't need a car. You may be asking, what is the going out/entertainment budget item? This is where I put most of my discretionary spending items, such as a manicure or meter fare for going to the beach.
I know some of you may disagree with my classification of the internet/cable as a want, but it is. Neither your home internet or cable is a necessity. I went alomst a year without cable or home internet. It's not that difficult if you have a laptop or netbook, especially since you can get free wifi at most places now. I did purchase a set of digital bunny ears, so I got all the local channels (about 20) for free.
Come back this afternoon for the other part of this post on how to put realistic figures into your budget.