CALCULATING COSTS

First, let’s define what we’re talking about. A personal budget is simply a summary comparing and tracking your income and expenses over a set time. For most of us, a monthly budget is probably the most helpful. Unfortunately, the word budget often takes on a negative connotation as something complicated and burdensome, but it shouldn’t be seen that way. Instead, consider your budget as a means of balancing income and expenditures to accomplish your financial goals and secure your future, rather than something painful that you must or ought to do. With a positive mindset firmly in place, here are a few suggestions for creating a monthly budget.

1. Collect the most important records and paperwork.

The more information you have, the better for budget planning.

Relevant records include things like monthly pay stubs, credit card payments, recent utility and phone bills, mortgage or rent statements, car payments, any insurance payments, and grocery receipts if you have them.

2. Total your monthly income.

Be sure to include any other sources of income in addition to your regular salary. In today’s gig economy, you may have a side hustle. Make sure you include that income minus any expenses associated with it.

One added tip here is that if your monthly income varies, consider using your lowest paying month as your baseline for budgeting.

3. Use your accumulated paperwork to total your monthly expenses, separating fixed and variable costs.

Fixed expenses must be paid and tend to stay the same from month to month. These include rent or mortgage payment, insurance, car payment, childcare, and telephone and cable services, among others. If you’re planning to save and/or pay off a set amount of debt each month — like a student or car loan — be sure to include those as fixed expenses.

Variable expenses include things likely to change each month. These include groceries, eating out, entertainment, and gasoline.

4. Make necessary adjustments.

If you find that income exceeds expenses, you’re off to a good start. You can allocate some of the left-over funds for things like added retirement savings, saving toward a down payment on a second home, or contributing more to your children’s college fund.

On the other hand, if expenses exceed income, take a hard look at places where you might reduce your spending rather than taking on more debt. For example, are you using that gym membership? Do you need all those monthly subscriptions?

Those “only $10 a month” charges add up quickly. If you live in an urban area with excellent public transportation or have started working in a home office, you might even consider getting rid of your second car.

The Ultimate Goal

Strange as it may seem, your goal is to budget to zero, meaning your monthly income minus expenses and savings equals zero. It doesn’t mean you’re spending every dollar you earn, but that you’re giving every dollar a job, even if the job is savings or an extra loan payment.

The 50-30-20 Budgeting Plan

If the goal is to budget to zero each month, how do you accomplish this? Many financial advisers recommend using the 50-30-20 plan as a guide.

• Allocate 50% of your income for essentials you must have, including a mixture of fixed and variable expenses — rent or mortgage, utilities, groceries, gasoline, and the like.

• Allow 30% for wants, such as new clothes, eating out, entertainment, and travel.

• Reserve 20% for savings and debt repayment.

Review and Tweak

Remember, circumstances often change. You have another child, move to a different job, or a health issue arises. Given life’s uncertainties, it’s essential to review your budget several times a year and make any necessary adjustments to keep it working for you. In other words, it’s all right to be flexible. It’s a budget, not a commandment engraved in stone.