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Budgeting - What to Include, Why, and Where to Start

Budgeting - What to Include, Why, and Where to Start

Katie Batterbee - Monday, November 13, 2017

What is a budget? A budget is a plan for your money. It allows you to track the money going in and out of your household. A budget can also help you prepare for large or unexpected expenses, encourage savings, identify wasteful spending, and help you accomplish financial goals, such as becoming a first-time homeowner, or improving your credit report.

Why do I need a budget? The single most powerful tool to improve your financial situation is to understand your financial situation – where your money is going and how and why you spend it. By laying out all of your expenses and goals, a budget breaks down the steps to financial improvement into day-to-day spending and savings habits. This will let you take control of your finances in order to accomplish your goals.

How do I create a budget?

  • There are numerous resources and tools that can help you construct a budget, such as mint.com, youneedabudget.com, and others. A more personalized approach can be had by working with a NeighborWorks pre-purchase planner to create a budget that is right for you.

    The basic steps to establish a budget, or spending plan, are as follows.

    • Determine your monthly net income – the amount that you take home each month after taxes, withholdings, etc.
    • Calculate your monthly expenses.
      • Fixed expenses stay the same every month – like rent or a car payment.
      • Periodic fixed expenses are paid periodically for goods and services, like car insurance, water, electricity, etc.
      • Flexible expenses change from month-to-month – groceries, entertainment, and travel.
      • Indebtedness expenses are debt for goods and services bought on credit. Credit card debt, student loans, and car loans are common types.
      • NeighborWorks Tip: It can be helpful to simply record all of your financial transactions for a month or more, so you can see where your money is actually going. Compare this to the expenses you have calculated.
    • Subtract your monthly expenses from your monthly income.
      • If expenses exceed income, plan to reduce debt and increase income.
        • Flexible expenses are often the easiest to reduce – cut back on discretionary spending for entertainment, meals out, etc. Distinguish between ‘wants’ and ‘needs.’
        • Pay down high-interest debts first, especially on credit cards. These debts cost you more the longer you owe them.
      • If your income exceeds your expenses, begin saving.
        • Start with an emergency fund - enough money to cover your basic living expenses and debts for a period of 3 to 6 months.
        • Retirement savings - 401(k) or IRAs are a good place to save money for retirement.
        • Savings for big purchases, like a down payment on a house, or a new car!
    • Evaluate your plan.
      • Which financial habits/circumstances are easiest to change? Which are the hardest? Is a house worth giving these things up?
      • Are you ready to implement this plan right now, or are there other things you want to do first?
    • If homeownership is your goal and it appears to be within reach, set a savings goal: buying a home. Compare your monthly budget against the upfront and ongoing costs of buying a home. These can include:

      Upfront Costs: down payment, inspection, appraisal, closing costs, escrows, reserves, and moving costs

      Ongoing Costs: Mortgage payments, utilities, maintenance and repairs, common charges, and emergency funds.

      Seems like a lot? Get in touch with NeighborWorks! We'll help you step by step to achieve your dreams of homeownership.

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