The coronavirus pandemic has caused a lot of families to worry more than ever about money.
Many families do not have a good feel for where their money is going. A simple answer to this problem could be a budget, which for many people may sound as exciting as watching paint dry.
But the peace of mind that can come from taking control of your spending and being able to make your next mortgage payment can make budgeting a rewarding and effective money management tool.
Here’s how to start a budget.
Q. What is a personal or household budget and what purpose does it serve?
A. A budget is a financial tool to help you to better understand and control your spending patterns. You create an itemized list of projected future income and expenses for each month. You can find plenty of online resources like budget worksheets to help you with this process.
Q. If I do not really know how much I am spending now, what is a good way to get started with budgeting?
A. Before budgeting for future income and expenses, it is a good idea to track income and expenses for a month or two to get a better idea of where your money is going. If you do this and are satisfied with how you are managing your money, great! Maybe you do not really need a budget.
However, if by tracking your expenses you find that you are spending far too much at vending machines, on impulse spending, or in other ways that are not in line with your financial goals, a budget may be just what you need to adjust your spending so it is more consistent with your financial goals.
Q. What are some of the main components of a budget for most people?
A. Income for most of us is our salaries or wages from employment. If you have a set salary for a period of time, budgeting your income each month should be simple. If you have income that varies from month to month, you should estimate your income for each month.
Other income such as interest and dividends should be included in your budget. Your take-home pay is the income that is available to you for spending and saving.
Some expenses like rent or mortgage payments and car payments are usually fixed in amount for a period of time and recur each month. Other expenses like groceries, dining out, charitable donations, and entertainment may recur each month, but these vary in amount from month to month. Try to estimate your variable expenses based on past spending.
Expenses such as personal property taxes, real estate taxes (if they are not included in your house payment), and perhaps car insurance and homeowner’s insurance are recurring, but often paid less frequently than monthly. For expenses such as these, divide the total annual expense by twelve and including that amount of expense in your monthly budget.
Q. How can a budget be used to help money management?
A. Monitoring your budget each month is important because this helps you to see if you are hitting your target for each expense category. You may decide that you need to cut back in some areas or that you can allow for more in other areas. Variable expenses such as dining out are easier to cut than fixed expenses like a house payment.
Q. How are your financial goals and values related to your budget?
A. One financial goal that most people have is to save money. Saving should be included in your budget just like any other expenses. Try to pay yourself first if possible by budgeting a set amount for savings each month.
Vacations are important goals for many families. Estimate the annual cost of your vacation, divide that amount by twelve and budget a monthly amount to be saved for it.
Most budgets will reflect the priorities for that person or family. If your faith and church are important to you, then your budget will reflect that through your charitable contributions.
If you use credit cards, be sure that these expenditures fit within your budget. It is good practice to try to fully pay your credit card balance each month so that you avoid finance charges. You do not want to still be paying for groceries that you purchased today three months from now.
Ken Mark is the president of the pastoral council of Sacred Heart Parish in Tonganoxie, was a professor of business at Kansas City Kansas Community College where he taught personal finance for 36 years and has been a contributor to a series of McGraw-Hill textbooks on the subject. He currently works part-time at Unbound in Kansas City, Kansas.