Itâ€™s time for our first post in our Skills Academy series! As we talked about in our last post, the Raccoon Valley Bank Skills Academy is focused on providing you with the financial skills you need to live comfortably and reach your goals. Since budgeting is the foundation for financial success, we figured it is a good place to start. Even if you are an experienced pro, you may find your finances have gotten complicated and are in need of some simplification.
What is budgeting?
Budgeting is the practice of setting forth your expenses for a specific period of time. It also takes into account the income you will receive and works to account for every dollar you take in and spend. The goal of a budget is not only to track your money, but to get your spending and income to balance.
Why is budgeting important?
Have you ever tried driving to a new location without knowing their address or using directions? Imagine if you got on a plane and the pilot comes over the intercom just after takeoff and says, â€œWe know the general direction weâ€™re headed, but weâ€™re just going to wing it and see when we get there.â€ Thatâ€™s what youâ€™re doing with your money without budgeting.
How to set up an initial budget
First, think of a time period that would make sense to budget for. For example, if you get paid every two weeks, that may be your time frame. Once you have a time frame for your budget selected, do the following:
- Keep or ask for a receipt for every purchase. Yes, even the $1.50 you spent on candy at the gas station.
- Make note of all expenses you have during that period that are automatically taken out of your account, i.e., student loan payments, mortgage payments or other auto-debits.
- Also make note of any income you get during that period.
Once your time period is over, total up your expenses and income. Then do some simple math:
Total income â€“ total expenses = your net spending
If you get a negative number, you spent more than you brought in. You then need to evaluate your spending. Try dividing your spending into categories, such as food, rent, clothing, etc. This allows you to see where you are overspending or if you are spending money on things you donâ€™t really need.Â From there, you will need to adjust your spending until it matches with your income.
Then comes the hard part: Actually following through on your budget. Try it out a couple of times through your established timeframe, making adjustments along the way. As long as you are at least breaking even, you are succeeding.
This is a very basic breakdown of budgeting. As we continue with our Skills Academy, we will get more in depth with budgeting and its various intricacies. Be sure to watch for more blog posts in the Raccoon Valley Bank Skills Academy next month!