How to Develop a Budget

It might seem that developing a budget should be a basic task.  But a lot of people are simply not inclined to use spreadsheets, balance checkbooks or lay out a formal budget.  Whether by nature, or as a result of a reaction to public school mathematics teaching some people just aren’t ‘number people’.

But everybody will find it in their self-interest to make the effort to take note of their expenses against income even if it requires getting someone else to assist with the task.  The budget should take in monthly income and outgo, projections of anticipated increases and decreases and some buffer for the unexpected.

If you feel uneasy using spreadsheet software - which is available for free these days either through Open Office (http://www.openoffice.org/) or Google Docs & Spreadsheets (http://docs.google.com/) - at least write down some figures on a legal-sized pad.

Divide the spreadsheet or page into two columns.  In one, record income; in the other write down every monthly cost.  In the costs column include all important regular bills, groceries, gasoline, etc.  Afterward add at least 10% for unexpected expenses, if you can.

Now, for a crucial add-on task that very few carry out: project various scenarios.  Make another budget (an imaginary one) that reads monthly costs, income and the difference between the two… except: monthly credit card interest amounts; auto loan interest; and 25% of any ‘impulse buy’ amounts.  Then sum the total of those three.

These three constitute the amount you could possibly avoid paying every month.  If the sum is even as low as 10% of your monthly expenses (and for some it’s higher), you are paying a substantial amount of your earnings to charges that could be avoided.

Only you, being as realistic as possible, can make a decision whether that 10% overhead you pay is worth what you get in return - having certain items earlier than you would by saving for them.  But, think about this: saving that 10% APR paid on $2,000 for one year is:  $110.  A lot of people pay only the minimum monthly payment, which amounts to much more.  That is $110 you are paying solely to have something costing $2,000 a year earlier.

No one but you can decide which is worth more to you, but developing a budget will help you out you make those decisions reasonably.