Income Identification
The first step to planning a budget is identifying the different sources of income that an individual has, and how much per month those sources of income add up to. Not only is employment taken into consideration, but other sources of income, such as child support, allowances and bonuses. The budget will deal with these amounts after taxes to give the budgeter a clearer view of how much income he has expendable each month. Being accurate with these numbers is extremely important, as all of the other budgeting mathematics will rely on the income.
Expense Identification
The budgeter must then begin to identify the expenses that she has each month. These expenses are broken down into two categories; fixed and non-fixed. Fixed expenses are those that are the same each month. Some examples of fixed expenses include a mortgage, car payment or insurance. Non-fixed expenses include things like clothing, entertainment and groceries. Knowing which payments are set in stone can help you calculate how much money you have left over after paying all of your fixed bills. Going through old bills is the best way to gather expenses and organize them in a budget; they help you identify what your past monthly expenses have been.
Budget Reconciliation
Once the income and expenses have been identified, the budgeter can then start allotting money in the budget to each of the expenses. Best done on a spreadsheet, each time an expense has money allotted to it, that money is subtracted from the income amount for the budget. In this way, the income is reconciled with the expenses, and you can easily view any gaps in the budget or become aware of places where more money can be spent or saved.
Trial Period
Testing the budget allows you to make sure that the budget that you've written down on paper will actually work in real life. Give your budget a month to work, and then assess it at the end of the month. Testing the budget is an important part of the budget planning process, because it helps you, the budgeter, to see places where you may not have allotted enough money, places where you can scale back, and if you have a budget that you can actually live with. Some budgets are too restrictive, and aren't easy to follow. Make sure that through the testing process you note whether your budget is easy enough to follow on the long term, not only when you're on your best financial behavior.
References
- Care One Credit: Budget Planning
- Plan a Budget: Budget Advice
