First, let’s define what a budget is and what it’s not. There can be misconceptions about having a personal budget, such as:
- It is only for those who make a lot of money
- It does not work
- It’s too complicated to do.
Well, those are just myths as what it all comes down to is how you manage what you have. Whether you have earned income or you receive assistance from other sources, you want to have a clear plan for maximizing the use of every dollar. Keep in mind that a budget is merely a spending plan or a guide to managing your financial resources constructively.
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There are many templates and tools available online that can be used to create a simple budget; however, you can get started by simply sitting with a sheet of paper and a pen. Whether you are developing a budget for your business or your personal finances, the steps can be the same. Again, keep the focus away from the dollar amounts in the initial phase so that you do not get a distorted view too early.
STEPS TO DESIGNING A BUDGET
- List all sources of Income (earned & unearned) – On the top section of your spreadsheet or paper, make a separate line item for each source of income. Perhaps you have rental property and receive income from that source. (or child support, etc,) List them all.
- List all areas of financial obligations or expenses – Every dollar counts regardless of how small the obligation may seem. It all impacts the bottom line so be as comprehensive or as thorough as you can be.
- Organize the list by categories – You want to make the distinction between your fixed expenses, your variable expenses, items of necessity or enrichments. This is where the budget really begins to take shape and things are put into perspective.
- Add the dollar value in the amount column – As you begin adding the numbers, keep in mind the frequency of the income or payments. If the budget will be set-up to measure monthly activities, you will need to break down any amounts you receive or pay out quarterly or annually accordingly to get the monthly value.
- Add Totals and also a Surplus/Deficit Line – Sum up both the Income (inflows) and the expense (outlays) sections of the budget. If you are using a spreadsheet, which is highly recommended, you can add formulas to show the net surplus or deficit as you fill the numbers in.
ADJUSTING & BALANCING THE BUDGET
Once all of the numbers are in and you see the results, or “the bottom line” as we say in accounting, you will now have the opportunity to tweak the budget or make adjustments. Now this is why setting things up by categories is so important because you want to be certain that you prioritize the necessities. This is where your monthly budget becomes your best tool for decision-making as it relates to your finances.
As you work your way through analyzing from top to bottom, you will now have a clearer picture of where the money goes. Take a look at those activities that are costing way more than you can afford or areas where you are overspending. Consider what are non-essentials and adjust accordingly. Zero in on lines like entertainment, membership fees for gyms or magazine subscriptions.
Ask yourself the hard questions like how often do I attend the gym or do I have time to read these magazines when they come in. Another hidden cost can be auto-renew memberships that should be cancelled. Every line item you are now able to eliminate or adjust, the dollars can now be diverted to other areas of greater necessity or better yet, as a savings. That dream vacation may be possible after all.
Lastly, bear in mind that you have control over your money. The budget is not one and done. You can and should adjust it when needed but be cautious with the fixed lines. There are areas of flexibility; however, wisdom must prevail when making the adjustments. This is why the categories are super important because you now have a clear guide of how much is at your disposal for what’s considered enrichments as opposed to necessities. Aim for a surplus.
In future articles I will explore additional ways to reduce monthly spending as well as efficiencies to maximize savings, both for your business and personal finances. Also, if you have not yet done so, please hop over to my website’s sign-up page and subscribe to my mailing list. (https://slsaccountingsvcs.com/sign-up/)
For further assistance with setting up your budget or designing a template for your specific business or personal finances, please visit us @ https://slsaccountingsvcs.com/contact/
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