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How to budget your income

Budgeting is the process of planning how your income should be distributed to pay your expenses. If your income is less than your expenses, the budgeting process also involves assigning priorities to the expenses to determine which ones can be eliminated or reduced. A good budget also takes into consideration the payment of state and federal taxes, which sometimes can be reduced by taking advantage of government incentives.

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Identify your sources of income
  • Wages
  • Social Security
  • Interest/Dividends
  • Child support
  • Alimony
  • Pensions
  • Other
Identify your expenses
  • Housing (mortgage, rent)
  • Utilities (gas, electricity, water)
  • Food (groceries, restaurants, carry out)
  • Medical (doctors, dentists, prescriptions)
  • Clothing
  • Telephone (cell phone, Internet)
  • Cable TV
  • Credit card payments
  • Transportation (car payments, bus, subway)
  • Insurance (car, home, health)
  • Taxes (federal, state, social security)
  • Savings for retirement, education, travel, etc.
  • Other
 

Organize your bills and tax forms
The best way to start the budgeting process is to collect your receipts and bills for the last several months and start organizing them into the expense categories listed above. Make new categories to suit your individual needs. You also need to have your tax forms for the previous year. The tax forms contain a summary of your wages and the amount of tax that you paid. Add up your monthly expenses and your monthly income to start your budget planning. You can use the worksheet at the bottom of this page as a guide.

Assign priorities to your expenses
Your expenses for housing, utilities, food, medicines, and clothing are indispensable. Insurance and taxes are unavoidable. Expenses for restaurants, entertainment, and social activities are discretionary. If you have long-term goals, such as traveling, you need to set money aside just as you would for any other expenses.

Pay down debt
One of the best ways of saving money is by paying outstanding credit card debt. Most credit cards charge from 18 to 21 percent per year. You lose about twenty dollars out of every hundred dollars when you carry a balance on a credit card. Accelerate your payment schedule to pay off the credit card debt as soon as possible. Once your balance is zero, you can still use your credit card, but pay the new balance in full when you receive the bill to avoid monthly interest charges.

Reduce your expenses
Where do you get the money to pay down debt? You eliminate unnecessary or discretionary expenses. If you use your imagination, you can come up with many ideas to reduce expenses and increase your sources of income. Here are some suggestions:

Lower your federal and state taxes
You can save for retirement and lower your taxes at the same time by taking advantage of tax-deferred programs such as the 401k savings plans available from employers. Some businesses encourage their employees to use these plans by matching a portion of the contributions. This is free money. Take it!

If you are self-employed, you can set up a SEP retirement account to save a portion of your income. Any money placed in the 401k or SEP retirement accounts is excluded from your income. Your taxes are lower because they are calculated on the income minus your retirement account contributions. If you are in the 25% tax bracket and you save $100 Dollars in a tax-deferred account, you will not pay taxes on the $100 Dollars; you will avoid $25 Dollars in taxes this year. The taxes on the saved money are paid at the time that you withdraw it, after age 55-1/2.

Click Here for a Printer-Friendly Budgeting Worksheet

Budgeting WorksheetMONTHLY
BUDGET AMOUNT
INCOME:
Wages and Bonuses 
Interest Income 
Investment Income 
Miscellaneous Income 
Income Subtotal 
INCOME TAXES WITHHELD: 
Federal Income Tax 
State and Local Income Tax 
Social Security/Medicare Tax 
Income Taxes Subtotal 
Spendable Income 
EXPENSES:
HOME: 
Mortgage or Rent 
Homeowners/Renters Insurance 
Property Taxes 
Home Repairs/Maintenance/HOA Dues 
Home Improvements 
UTILITIES: 
Electricity 
Water and Sewer 
Natural Gas or Oil 
Telephone (Land Line, Cell) 
FOOD: 
Groceries 
Eating Out, Lunches, Snacks 
FAMILY OBLIGATIONS: 
Child Support 
Alimony 
Day Care, Babysitting 
HEALTH AND MEDICAL: 
Insurance (medical,dental,vision) 
Unreimbursed Medical Expenses, Copays 
Fitness (Yoga,Massage,Gym) 
TRANSPORTATION: 
Car Payments 
Gasoline/Oil 
Auto Repairs/Maintenance/Fees 
Auto Insurance 
Other Transportation
(tolls, bus, subway, taxis)
 
DEBT PAYMENTS: 
Credit Cards 
Student Loans 
Other Loans 
ENTERTAINMENT/RECREATION: 
Cable TV/Videos/Movies 
Computer Expense 
Hobbies 
Subscriptions and Dues 
Vacations 
PETS: 
Food 
Grooming, Boarding, Vet 
CLOTHING: 
INVESTMENTS AND SAVINGS: 
401(K)or IRA 
Stocks/Bonds/Mutual Funds 
College Fund 
Savings 
Emergency Fund 
MISCELLANEOUS: 
Toiletries, Household Products 
Gifts/Donations 
Grooming (Hair, Make-up, Other) 
Miscellaneous Expense 
Total Investments and Expenses 
Spendable income minus
total expenses and investments
 

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