Budgeting Basics

Budgets are like the New Year’s resolutions of personal finance. We all know we should have one and we all know it’s a fairly simple thing to follow—at least in theory. Like resolutions, we often map out personal budgets with the best of intentions, only to abandon them a couple of weeks later.

Whether you’re planning your first budget or re-evaluating your current one, here are some tips and ground rules to set you up for success:

#1 – Be real about your income
One of the most common budgeting mistakes is using your gross income instead of your net income as the starting point for your earnings. This can throw off your budget by giving the impression that you have access to more money than you actually do.

05_E_Handout_Estonian#2 – Saving is an expense too
In many budgets, the savings category ends up getting whatever is left over after the “more urgent” expenses have been paid (and – in most cases – the not-so-urgent ones too!). The only way to take your savings seriously is to give it the same priority as your living expenses. If you contribute a set amount to your savings at the beginning of the month, your savings will grow so much faster and you won’t be able to “accidentally” spend that money on something else.

#3 – Look to your budget instead of your balance
For many people, budgeting simply means checking your account balance before making a purchase. Although it’s good to stay on top of your account totals, looking at your balance is an unreliable way of determining what you can and can’t afford. Your account balance cant communicate, for instance, how much money needs to be left untouched in order for you to pay your taxes this year or to renew your gym membership. Get into the habit of referencing your budget instead of your account balance before spending money.

#4 – Prepare for emergencies 
Emergency expenses have a way of turning into a huge source of debt. That’s why emergency funds are an important part of any budget and should be a separate category from general savings goals. This fund should be easy to access in the event of unemployment, illness or a critical home or car repair. Building your fund to cover 3-6 months of living expenses is a good rule of thumb.

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