Budget Basics

Learn to Create and Stick to a Budget

Practical money skills are an important part of managing life. By handling your personal finances wisely, you can enjoy peace of mind, financial security, buying power, and freedom that will enhance the rest of your life-Practical Money Skills for Life.

It's Easy to Create a Budget that Works for You

A budget can help you pay your bills on time, cover unexpected emergencies, and reach your financial goals-now and in the future. Most of the information you need for your budget is already at your fingertips. This pamphlet explains how to create a budget and stick to it.

How to create a Budget that works for you

Use This Worksheet to Begin Your Budget

You'll get a clearer picture of your monthly finances and a starting point for your budget by completing the attached worksheet. Follow the simple steps outlined below.

1. Add Up Your Current Income

To begin, list all of your sources of income and how much you usually receive from them each month. Include not only your salary, but also any other money you get from second jobs, gifts, or other sources. Be sure to list only the after-tax, or net, figures. For best results, don't count income you can't rely on, and always estimate on the low side.

2. Figure Out Your Current Expenses

Collect your credit card and debit card statements, checkbook register, and cash receipts from the last few months. They'll tell you how much you spend and what you spend it on. List your average monthly expenses in two categories:

• Fixed expenses - such as rent and car loan payments-that are the same each month. You can include fixed expenses that are paid less often-such as life insurance-by figuring out their monthly cost.
• Variable expenses - such as utilities, phone, groceries, education, clothing, and entertainment -that are different each month. These are expenses that, to some degree, you can control. Don't forget to include a figure for pocket change purchases, such as snacks, parking fees, and lottery tickets.

3. Do the Math and See Where You Stand

Subtract your expenses from income. The result will tell you how you are managing your money now and give you a starting point for your budget.

• You're already doing well if at least 5% of your net income is left after expenses. This is the minimum amount to set aside in your savings account each month for a healthy financial future.
• You need to make changes if you have less than 5% of your net income left or if the remainder is below zero. Your variable expenses are too high and need to be adjusted immediately.

4. Use What You Learned to Set Up Your Budget

Think about what you want in the future-for example, the ability to handle unexpected costs, make special purchases, take vacations, and plan for retirement-and set a monthly savings goal for yourself. Then review your current expenses, especially your variable expenses, and see where you can cut back in order to reach your savings goal. With a little creativity, you can usually reduce entertainment and other variable expenses without really noticing the difference. For example, if you usually go out for lunch on workdays, you could save $400 a year just by bringing a lunch from home twice a week. And, instead of going out for a cup of coffee, make it yourself and save another $400 a year-or more.

You also might consider looking for ways to increase your income-for example, by taking on a part-time job or by turning a hobby into a fun way to make extra money.

BUDGET WORKSHEET
	MONTHLY INCOME
	Income #1		________________
	Income #2		________________
	Interest		________________
	Pension		________________
	Other		________________
		TOTAL	________________
	MONTHLY EXPENSES
	Fixed
		Rent/Mortgage	________________
		Car Loan	________________
		Car Insurance	________________
	Variable
		Credit Card	________________
		Groceries	________________
		Utilities	________________
		Phone	________________
		Transportation	________________
		Child Care	________________
		Entertainment	________________
		Clothing	________________
		Medical	________________
		Education	________________
		Misc.	________________
		TOTAL	________________
Subtract expenses from income
	RESULT		________________

5. Stick to Your Budget Once It's in Place

If your budget is realistic and if you use it to guide your expenses, you'll be better prepared for emergencies, other unexpected costs, and a financially secure future. Keep in mind, credit cards aren't free money and must be responsibly managed in your new budget. For tips on keeping your credit card purchases within your budget, see below.

Tips for Keeping Your Credit Cards in Control

• Always follow the 20/10 Rule of Credit. Never borrow more than 20% of your annual net income, and never let your monthly debt payments be more than 10% of your monthly net income.
• Know the difference between needs and wants. Before making a purchase, ask yourself, "Do I really need this?" You can lower your monthly expenses by avoiding purchases you can do without.
• Always try to make more than the minimum payment due on your credit card bill. Low minimum payments are designed for convenience, but not for quick payment of your balance.
• Never let your credit card reach its spending limit. Always keep part of your credit available for emergencies and other unplanned expenses. Maxing out your credit cards can also be perceived by lenders as a negative on your credit report.
• Know what your purchase will really cost. Remember that, if you charge a purchase to your card and don't pay it off right away, you'll end up spending more than the original price.