Many people take the word Budget as an accountant’s clerical task of punching in numbers and their respective expenditure, and as to say, this isn’t far from the truth. A budget makes a record of all the money coming in and going out in a home, office, business or other works. The only problem is that it isn’t created by itself automatically; you’re the one that is going to have to do the unpleasant task of noting down all the transfers; not just the big ones.
Yes, the task is somewhat boring and unpleasant to do, but have you ever heard of businesses succeeding without proper financial budgets being kept? For private houses, a finance budget is fundamental in keeping order in the house. It makes a person more responsible and makes him/her know perfectly when to spend, and when not to; when things are going out of hand and when you have enough money that even if you use up some, you’ll have enough to save in the end. Before we go towards the instructions of creating a budget, it’s important that you realize the gain of entering the information as detailed as possible.
Eventually, the budget tells the inflow and outflow of money, but detailed data will also help you analyze where the money came from, and where is it going. You can then compare the expenditure with previous months, and prepare financial plans for the upcoming months. The following will help you in creating a finance budget and to maintain it properly with correct allocation of expenditure.
Collect Relative Data in Other Financial Books
Utility bills, paychecks, ATM slips, bank receipts, share cards and any other statement or source of income or expenditure from which you could collect data and then record it into the budgeting books. Try digging up and researching more detailed info about where the money recorded came from and where was it spent; this will give you a clearer picture about the situation.
Keep Details of All Sources of Income
First of all determine all your sources of income from the paperwork and statements you’ve just put together. But if you’re self-employed, or you’re married, be sure to record all sources of income including your spouse’s earnings. Other sources such as share dividends, bank interests, side businesses, part-time internet work etc should also be included. It’s better if you record the net income, i.e. earnings less the normal income tax; this would give a better view of what your total earnings represent of the yearly ones and these will be helpful in times of both recessions and booms.
Keep Details of All Expenses Incurred
This column should be separately kept and on a monthly basis, so that it can be easily compared to the income of the particular month. Record everything that you plan on spending in a month’s time period. Everything that you actually spend! Includes food payments, insurance premiums, house repairs, computer upgrades, dry cleaning expenses, interest on loans and all other items where money actually leaves your pockets.
Now that you’ve recorded all the necessary expenditure in the books, you need to classify it into further categories i.e. fixed costs and variable costs. Fixed costs, as the name quite clearly notifies, are unchanged expenses each month and they are necessary to be incurred in everyday living such as credit payments, rent, car costs, mortgages, college fee, internet service expenses, taxes and others. These expenses usually don’t tend to change and they’re a vital part of the budget.
Variable costs include those that can vary monthly due to many factors such as the change in standard of living, change in interest rates or change in earnings. Gas costs, food and groceries, luxury, entertainment, subscriptions and eating out etc. These costs are relatively more significant and are likely to be adjusted with the budget.
The tedious task of recording samples of money earned and spent is now over, you now have to evaluate your current budget and assess your condition whether good, bad or satisfactory. Here’s how you will do that. You now have the totals of your income earned and the money spent on different expenses that occurred in a month’s course of time in front of you. Compare the totals and watch the figures and calculations closely for any computation mistakes. If your income totals exceed your total expenditure calculations, this means its great news and you’re having a gain in your income, which shows that even after the expenses deducted, you’re saving some of the income. If you’re being shown a greater payment column than the total receipts, there’s nothing to worry about, this is why budgets are made; to spot shortages and work on their resolution.
Adjustments will have to be made in the case where expenses surpass the income. Your main aim should be to both reduce the expenses to a break-even (no profit, no loss) level where expenses equal income or you sufficiently decrease your expenses and increase your earnings at the same time to have a positive difference. Try to eliminate, or at least reduce, as many variable expenses as you can.
When you work hard on making your budgets more successfully on the positive side, you get enough encouragement to also perform this in the real world. Budgets should be reviewed monthly and compared with previous months to know the current financial position of the house, and whether it was on the same line as of the financial prediction in the finance budget. When evaluated carefully, these financial statements would be able to show you the deficiency in your income or increase in expenditure, the reason of inequality and ways where this could be improved.