Fresh Finance: Budgeting 101

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The first step to financial freedom is budgeting, yet most people fail to draft up a monthly budget.  Why?  I have no idea but its time to breakdown this sometimes mysterious exercise in money management.  Budgeting is a simple mathematical equation that any 5 year old is capable of performing.  You add and subtract, it’s that simple!  If you have ever found yourself unexpectedly short on cash, over drafted an account, or had to borrow money, odds are you aren’t using a budget for your money.

What is a budget?  A budget in its simplest form is a visible document showing your calculated total income (money you receive) minus your total expenses (money you spend).  See how simple that is?  Depending on your time commitment, level of desired detail and frequency of pay, you can formulate a budget once a month, twice a month, or even weekly.  However, I would highly suggest you don’t go over extended periods longer than one month.

So you should be asking yourself at this point, how do I set up a budget?  I’ll tell you.  I personally prefer using Microsoft Excel but you can use a pen and pad to jot down your numbers. The method is up to you.  Start by titling the page “Income Statement” followed by the name of the month you are budgeting for.  See the example below.  Next, create an “Income” section and an “Expenses” section beneath that.  In the Income section, list all of your steady income sources.  Common sources include work paychecks, SSI, Real Estate income, and other financial investments.  Also, account for the one time unexpected incomes like government stimulus checks or birthday money.  Add these amounts up and put the total in the row titled “Total Income.”

Repeat this step for the “Expenses” section.  List every monthly expense you have including one time expenses for that given month.  You should start to notice how the list of expenses typically runs a lot longer than the list of incomes.  This is a key element.  If you’re stuck formulating your list, common expenses include cell phone bills, rent payments, entertainment, auto insurance, and groceries.  Anything that requires you to pay out money is considered an expense.  Since you get the idea, list all of your expenses and include a “Miscellaneous” expense for the unexpected expenses you can’t categorize somewhere else.  See the example below.

If you are wondering what estimate amounts to use, check old bills typically going back 2-3 months and generate an average expense amount.  Once you have estimated all of your individual amounts calculate a total and put it in the row titled “Total Expenses.”  Congratulations, your 2/3rds of the way finished!

The final step in creating a budget is calculating your net profit.  Your net profit is your total income minus your total expenses.  The net profit is the amount you have remaining to spend or SAVE as you choose.  This money left is money that is obligation free.  If the calculation results in a negative number, then you have what is called a net loss for the period covering your income statement.  You actually owe more money than what you brought in and will need to borrow additional funds from an outside source.  The alternative solution is objectively looking at your expenses and seeing where you can reduce them.  Congrats, you have officially set up your first budget!

I hope you found this article useful. Take an hour out of your day to see where you stand financially.  I bet you will be surprised by what you will find.  Good luck and remember only through practice can we master the act.  Also, stay tuned for Budgeting 101 pt. 2.

Let’s Get Wealthy!

Article by Kevin Breckenridge

Helping to raise the financial conscious of those who are consciously aware of the necessity to obtain financial freedom. Through education, exposure, open discussion, and action we can eliminate the financial strain on our pockets. Doing so will allow us to build the capital and asset portfolio necessary to truly enjoy our life as well as elevate the launching pad for our future generations. Follow me on Twitter @Legacieinmotion

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