Financial Literacy
For Your Future



Should I Focus on Creating and Living on a Budget?

This story revolves around the “old” saying…”prior planning prevents poor performance”. It is no surprise that the concept of good planning is integrated into this entire financial literacy project. From remembering financial choices are all about YOU, to setting well thought out goals, to creating and following a budget, this case is not to help you decide whether to create and use a budget, but how much effort and commitment should you decide to employ. Think back to some of the beginning basics ideas and recall the notion of marginal thinking. This concept will help you in forming your perspective on these two related questions. The real questions then become “how much should I budget and how committed should I be to what I create"?

Let’s start by gathering the facts about your monthly financial environment. This will help you get a better feel for your financial condition and it will form an effective outline for a budget. 

First, identify your monthly income. List your monthly income from your job. Let’s use gross income or money before deductions like income taxes, social security, insurances, and any other deductions you may have. These will be “expensed” later in your budget. Monthly income can also include interest income, gifts, investment dividends, part-time job earnings, entitlements (transfer payments) like disability income or pensions. Give this section a good deal of thought because you don’t want to cheat yourself out of any money. 

Second, identify your monthly fixed expenses. These are expenses that you are solidly committed to paying. Although you know “I have no choice” is not an option, fixed expenses are commitments that would be difficult to get out of paying in the short run. These fixed expenses include taxes, rent or house payment, insurance, car payment, doctor bills, utilities, or minimal food. 

You are probably thinking about other expenses and wondering where they should be listed. Most of these should fit under the category of variable expenses. These are expenses that you have some discretion as to whether you spend money on these items or, at least, how much you can spend. These items include clothes, entertainment, transportation, savings (although some people think savings should be a fixed expense), charities, and gifts. This list may not be complete for you, so pay special attention to this when you chat with a peer about your responses to the decision making guide. 

You are now ready to gain some benefits from the budgeting process. Total the total monthly income section. Then total the two monthly expenses sections and subtract the total expenses from the income. How do you stand? Is the result a positive or a negative number? The result of the calculation can help you understand why you end the month financially stressed or not. In either case, you are now ready to start the budget creation process.

Begin by listing the income and expense categories on a sheet of paper or computer. Perhaps you want to use one of the many computerized budget formats provided by financial institutions, credit bureaus, etc. It doesn’t matter as long as you are thoughtful and accurate in your projections. Remember in a budget, you are listing what you earn and want to spend as they reflect your goals and reasonable expectations. The numbers you put in a budget may not be the same as your initial balance sheet, but instead they should reflect legitimate expenditures given your goals.

How far should you go with the created budget and how many times should you refer to the proposed budget to direct your financial decisions? These are the questions that the decision making guide can help you answer. It should be no surprise that some people create a minimal budget and some people don’t refer to or follow their budget no matter how complete or how much thought went into its creation. On the other hand some people work very hard to create and use a budget often and see it as a work in progress and make it better and better. 

HOW MUCH IS BUDGETING A PART OF YOUR LIFE? Let the guide help you answer the questions. Then finish the creation of your budget and give it a try. Remember, the more you use the decision making guide to form your opinions about budgeting and budgets, the more you will use them at the level you feel comfortable with.

Applications Insights Guide - click here for facts to aid your decision making process


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