Blog with MAE Capital

Budgeting your income and expenses is an important process and should be done once a month as income and expenses changes.  Some basics to budgeting are knowing exactly what you net income or take home pay is monthly, as well as knowing what you are spending your money on. 

This first part of know how much money you are making a month may or should be the easy part of this task.  The trick is to use your net pay or after tax pay.  If you are on commission or self employed you should have a grasp of what your income will look like in the coming 30 days.  Write this number down, be conservative, meaning if you think your take home pay is going to be $3,000 after taxes but are not sure go lower try $2,000 as not to over extend yourself.

The next part is going to be much more difficult and will require you plan your month expenses out. You want to prioritize your expenses starting with the roof over your head and the vehicle that gets you to work every day.  So the expenses you should list are as follows;

1. Rent or House payment

2. Vehicle payments

3. Electricity and utilities

4. Food

5. Credit card Debt

6. Insurance

7. Taxes

8. Leisure activities

All of these expense items are important to take into consideration when looking at your budget.  These expenses reflect your life style at the present time.  At this point you have to look at your income and your expense and check to make sure that your income or "Net income" covers all of your expenses if it does not then you are deficit spending and you need to cut back on expenses as your credit card debt is probably rising every month. 

This technique of budgeting is as old as money itself however, this is not really ever taught to you in school, it is usually left up to the parents to do so.  The problem is sometimes the parents have never been taught this either and there is a vicious cycle developing of bad credit and poverty.  In order to "get a head" of the cycle you need to be diligent with your income as well as your expenses. 

How do you "get a head" you ask?  Well it is not easy and most of the time require sacrifice of life style.  Let's assume that your net income is more than your rent or house payment, utilities, phone, your car payment, your food, and credit card minimum payments.  The part the is sending you into deficit spending might be your need to have a $4.00 Starbucks coffee everyday, or you have to see the latest movie that comes out every week.  Remember I wanted you to write down all expenses down to the coffee every day as they all add up.  For example that $4 coffee every day is $28 a week and $1,456 a year, the movie just for you is $20 a week or $86 a month and $1,040 a year.  These are just items that average people do and treat themselves to regularly.  Dig deep into what you spend as that is what you can control, generally you can't control your income.  

Now that you can see where your money is going try and cut a little here and there and you will be surprised how quickly things turn around.  If you are one of the lucky ones where your net income exceeds your expenses that difference will be savings.  This is ideally where you want to be as savings is your fall back position or even your retirement.  If you can control this you will find yourself in position to invest and let your savings work for you by making good sound investments.  The ideal savings model has you with 6 months of reserve in savings at all time, meaning 6 months of all your expenses in savings. 

I hope this helps you remember wealth is earned by smart people who budget.