How to Set Up a Budget
Part 13 in a series about how to become successful self-employed
Once you get a handle on your financial situation and begin taking steps for the future, you will be closer to sitting down to write that letter of resignation. One of the most important steps is setting up a budget. You’ll find dozens of way to set up a budget, but here are the basics:
Step 1: Determine income and expenses
Write down your income. Include all sources of income – what you receive yearly, monthly or weekly, depending on how you choose to track your money. Include:
- Self-employment/part time income
- Retirement pay and/or government-source income (e.g., Social Security, disability unemployment, annuity, and pension payments)
- Interest and dividends
- Alimony and/or child support
- Rents and/or royalties
- Income from trusts
Step 2: List fixed expenses
Add up the expenses that generally do not vary much from month to month, and break them down monthly and yearly (if you’re using the envelope method, you will end up with an envelope for each of these expenses). Include the following:
- Taxes (federal, state and local)
- Mortgage or rent
- Insurance (medical, auto, homeowners, life, and other)
- Automobiles (costs to operate minus insurance cost)
- Dues and fees paid to associations and clubs
Where the amounts vary by month, as with a heating bill, total your payments for the year and divide by 12 to get the monthly amount. Divide bills that you pay yearly or quarterly by 12 to arrive at a monthly amount. This will help you to arrive at a more functional budget. If you have large credit card debt, indicate the amounts you actually paid, not the minimum monthly payments.
Step 3. List variable expenses
Next, add up your variable expenses for the previous one-year period, using your checkbook and credit card statements as guides (if you’re using the envelope method, you will end up with an envelope for each of these expenses). Include:
- Furniture and appliances
- Gas, oil, and commuting costs
- Medical care
- Fees paid to accountants, lawyers, and other professionals
List yearly, monthly and weekly expenses. This will allow you to include big items like quarterly insurance payments.
You might want to add "petty cash" or "miscellaneous expenses" to cover spending cash that does not go for categorized items. This will cover cash that you withdraw from your checking account, but do not keep track of. Allow yourself a reasonable budgeted amount for this category.
To check whether you’ve included all your expenses, subtract the total yearly figures for variable and fixed expenses from your yearly income figure. If there is a large gap between income minus expenses and the amount you saved, you spent money somewhere that you have not captured in this exercise. Keep digging until you find it.
Step 4: Identify your priority and non-priority spending
This subjective step will depend on your circumstances and the way you choose to spend your money. Mark items as “necessities” or “luxuries.”
Step 5: Add on an amount for unexpected items or emergencies
As sure as summer follows spring, unexpectedly large bills will arrive – for car repairs, or home maintenance, or medical bills. In your budget, set aside an “emergency fund” that you can draw from if necessary.
Step 6: Add on something for regular saving or investing
Try to set money aside regularly, even if it’s only a small amount, for longer-term savings or investment, which you can use for future expenses – a new water heater, new car – or to tide you over when you quit or lose your job!
Step 7: Subtract your total spending from your total income figure to indicate your financial position.
Step 8: Adhere to the budget!
At the end of each month, and at the end of the year, check totals to see whether you’ve under- or overspent your budgeted amounts. Perform these monthly and yearly reviews and revise your budget as necessary.
Part 14, “Dig Yourself Out of Debt,” continues the series on becoming successfully self-employed.
Tags: Budgeting , Self-employment , Personal Finance , Recordkeeping , Spending
This work is licensed under a Creative Commons Attribution 3.0 License.