You don't have to listen to the news to know that each paycheck seems to disappear faster than ever these days. Inflation affects every aspect of life, such as grocery shopping, commuting, air travel - nothing is left untouched. One of the most effective tools available to counter the effects of the rise in prices and decline in the value of money is a household budget. Here’s some ways you can fight inflation by getting back to budgeting basics.
Despite their somewhat undeserved negative reputation, budgets can help you to accurately determine your current financial situation and create a better plan for the future.
The first step in preparing a budget is to gather bank statements, receipts, and records to create a list of all your income and expenses. Several useful budgeting apps are available, or you can use a tracking document on your computer or a notebook. One or two months' worth of data helps give you an idea of average expenses. As you record your expenses, you may begin to see areas where you can reduce cash outlay, which should be noted as you go through each category.
As you record items, it is helpful to classify them into broad categories such as Income, Fixed or Necessary Expenses and Variable or Optional Expenses.
- Income may come from wages, investment income, sales, or self-employment.
- Fixed or Necessary expenses such as mortgage or rent, insurance, utilities, and loan payments are considered fixed expenses that you must pay every month. Necessary expenses include groceries and prescriptions, things you need as opposed to things you want.
- Variable or Optional expenses – this category includes costs of dining out, entertainment, clothing, travel, and recreation. These expenses generally fall under "wants," not "needs."
- Subtract the total expenses from the total income to find your net income. A positive result means you are meeting expenses with income to spare. A negative number indicates a greater cash outlay than income, meaning you may be dipping into savings or adding to credit card debt.
Create Your Budget
When you understand your current financial status, you can decide on a goal for your budget. You may choose to budget a single year or a more comprehensive long-term plan. With your goal in mind, begin estimating your upcoming income and expenses.
- Be sure to underestimate your monthly income and overestimate your expenses. That way, if you spend less and earn more, you'll have a greater sense of accomplishment when comparing reality to your budget.
- Costs that seem fixed may be adjustable – using a programmable thermostat and turning the lights off when they are not needed may help lower the utility bills.
- Don't forget to budget for savings deposits and investments to create a buffer for future unexpected expenses.
- Remember to include any subscriptions or automatic payments that occur periodically.
- Don't skip health checkups, dental cleanings or cancer screenings. As Erasmus said, "Prevention is better than cure."
- Once you've created your budget, continue recording income and expenses to compare to those budgeted.
- Incorporate money management into your regular routine. Regular review is necessary and will instill useful habits.
A budget is a powerful tool in your financial toolbox for reaching your money management goals. Myrick CPA has budgeting and accounting specialists to help when it comes time to create or review your budget. Contact Myrick CPA for an appointment to make the most of your budgeting tool.