Does Your Budget Really Work? - Accounting Accidentally

Great, you have a budget for personal finances- but does it really work?

Everyone uses some kind of budget, even if it’s not formally put in writing. Many people aren’t aware of their budgeting process, but they put money away for future use, they prioritize their bills, and they use any money left over to treat themselves. All in all, it’s a way of life, and it’s something most people manage without even thinking about it.

But does your budget really work for you? Do you need to put so much money away in savings every time you get a paycheck? Are the ‘essentials’ you’re told to buy all that essential, or are there cheaper versions out there that would make money easier for you? Let’s think about all that below.

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Three Important Steps

If you don’t yet have a personal budget, there are three important steps to start the budgeting process:

Net income (net pay): Get a piece of notebook paper, and write down your monthly net income at the top of the page. This is the net amount that you’re paid as an employee, or the average net amount you earn as an independent contractor/ freelancer.

Fixed vs. variable expenses: Take a look at your banks statements and credit card activity for the last few months, and use that information to group your monthly spending into categories. Label each category is fixed (mortgage or lease payment, car payment), or variable (meals out, entertainment).

Savings account funding: Finally, makes cuts to your variable spending and use those dollars to fund a savings account each month.

Use these tips as your starting point to budget, and review your spending each week.

What About Savings?

On the one hand, there are a lot of people out there who aren’t putting enough into their savings, and that’s usually because they don’t have anything to put in their account. But on the other hand, there are a lot of people who like to overcompensate, and sock away more than they need to each time they’re paid.

Saving for a rainy day is important and makes sense, but the amount you save may put a strain on other parts of your personal finances.

If you’re sacrificing your ability to live comfortably now for something that might or might not happen in the future, you’re going to have to rethink your budget a bit. After all, good Financial Planning takes a bit of practice, and you’re going to have to start distributing your earnings out a little more fairly to make sure you’ve got groceries and bills covered, and then fund a savings account.

Long Term vs. Short Term

This issue doesn’t mean put everything back into your savings account! This simply means you may be allocating too much or not enough money to each facet of your life, even when following a well-planned financial budget.

If you’re only looking at your finances on a monthly or weekly basis, you may be missing the big financial picture. Take a long look at your budget once a year, and considering how you’re making progress toward a long-term goal, such as a downpayment for a house.

If you look at your finances as a yearly picture, on the other hand, you’re going to be able to budget much better on a monthly basis, instead of taking it as it comes. Of course, a lot of people don’t have this luxury, but if you’ve found yourself a stable income, this will be the best course of action to improve your financial situation.

You’ll be able to take into account your total earnings, the big expenses you’re going to have to fork out for, and you won’t be surprised by anything either.

Your budget is something that you’re going to need to change from time to time, and there’s no one size fits all rule that can be employed here. But make sure you’re always aware of what’s coming in and out!

This post is for educational purposes only.

Ken Boyd

Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies

Co-Founder: accountinged.com

(email) ken@stltest.net

(website and blog) https://www.accountingaccidentally.com/

(you tube channel) kenboydstl

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