Financial Literacy for Everyone

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Budgeting

A budget is a plan for your future income and expenditures that you can use as a guideline for spending and saving. Although many people already use a budget to plan their spending, many of us also routinely spend more than we can afford. The key to spending within your means is to know your expenses and to spend less than you make. A good monthly budget can help ensure you pay your bills on time, have funds to cover unexpected emergencies, and reach your financial goals.

Most of the information you need is already at your fingertips. To create or rework your budget, follow the simple steps outlined below to get a clear picture of your monthly finances.

1. Add Up Your Income

To set a monthly budget, you first need to determine how much income you have. Make sure you include all sources of income such as salaries, interest and any other income, including a spouse's income if you're married.

If you receive a salary, use your after-tax pay rather than your before-tax pay amount Taxes are usually taken out automatically, but if they're not, remember to include them as another expense.

2. Estimate Expenses

The best way to do this is to keep track of how much you spend for one month. The worksheet below divides spending into fixed and flexible expenses. Fixed expenses are those that generally do not change from month to month, such as rent and insurance payments. Flexible expenses are those that do change from month to month, such as food or entertainment. If some of your expenses for one or more categories change significantly each month, take a three-month average for your total.

3. Work Out The Difference

Once you've added up your monthly income and your monthly expenses, subtract the expense total from the income total to get the difference. A positive number indicates you're spending less than you earn. A negative number indicates your expenses are greater than your income. This means you will need to trim your expenses to live within your means.

The next step is to track your budget over time to make sure you're sticking to it. If you find you aren't able to follow your budget successfully, it may mean your plan isn't flexible enough. It can take revisiting your budget a few times to find the balance that works for you.