A budget is simply a picture, forecasting your income, spending and saving plans for a period of time. You can create a general budget for your overall financial activity for the year or month, or you can construct a budget for a specific event like a wedding or a party. You will need to consider your regular sources of income, your bills, taxes, fees as well as irregular income and expenses. Your budget should be based on major necessities, including housing, food and transportation, along with rigid and flexible expenses from insurance to holiday gifts. The most important thing to remember is to track your budget with your actual spending to get the most accurate picture of your financial status, get yourself out of financial trouble and set goals for your financial future.
According to Crown Financial Ministries, three main categories belong in everybody’s budget: housing, food and transportation. The organization says that if these three items — including their related expenses — exceed 70 percent of your income, “it will be almost impossible to have a balanced budget.” Your housing costs includes not just the price of your rent or mortgage, but also your utilities, taxes, homeowners association or condo fees and parking to name a few. Bankrate.com says the cost of housing should total no more than 35 percent of your income. Food includes the groceries you put in your fridge, as well as the lunches you buy at work and your weekend dining out. Transportation includes the loan payment on your car or the fare for public transportation you need in a specified period of time. If you have a car, you need to also factor in insurance, gas, registration and inspection, and maintenance and repair.
Set aside an amount each month to pay down debt. Plan to keep your debt payments to less than 10 percent of your after-tax income, says the West Virginia Financial State Treasurer’s Office. For example, if your take-home is $4,000 per month, you should spend no more than $400 each month for credit card payments, installment loans and other borrowing. This requires you to keep your credit spending to this percentage of your income or lower.
Savings, College And Retirement
Although the recession of the late 2000s improved the national savings rate, Americans generally save too little of their income. This means too many won’t be able to weather a financial storm and too many live paycheck to paycheck. Financial experts like those at Bankrate.com and Crown Financial Ministries recommend that you put away at least 5 percent to 10 percent of your pay for a rainy day. You need a few months’ worth of expenses saved up in an emergency fund, for such cases as a job loss or extended health condition. In addition, you should strive to max out your work retirement savings, but also put something away of your own, such as in an Individual Retirement Account. Budget money for your children’s future educational expenses as well.
Budget for life and health insurance, phone, Internet, child care expenses if appropriate, as well as any other necessary expense. Although your employer or state may cover the majority of your health care, you should plan to cover what insurance won’t pay, including copayments, prescriptions, and devices and items you need to monitor your health. Budget for dental and vision care, which typically have lower levels of coverage on insurance plans. Crown advises that your medical expenses comprise no more than 4 percent of your take-home pay. In addition, you should plan for occasional expenses such as clothing, gifts, care for a pet or other important, but relatively flexible spending that you can foresee.
Plan ahead for fun. It’s easy to let spending get away from you with just a few nights on the town or weekend getaways. Set aside an amount you can safely spend on entertainment, traveling, recreational and otherwise non-necessary indulgences. Crown says let it equal about 6 percent of your income.
- Crown Financial Ministries: Budgetometer
- Wall Street Journal: Personal Finance Tools
- Crown Financial Ministries: Spending Plan Online Calculator
- U.S. Department of Education: Budget Calculator
- Bank of America: Budgeting
- U.S. Bureau of Economic Analysis: Personal Saving Rate
- SuzeOrman.com; Emergency Planning Remains Job #1; May 2009
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