Index

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.

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.

Always think before buying something. Is it necessary? Is it a one-time expense, or will there be recurring expenses? When you get a dog for companionship, for example, in addition to the food and veterinary bills, you may have kennel charges for when you go on a business trip, or you may need to buy new rugs or furniture to replace those spoiled by the dog. You will also have less time to earn money because you will be busy walking the dog. Think about the consequences of your purchases. Many lottery winners buy big houses only to lose them later because they did not take into consideration the yearly expenditures of taxes and the cost of maintaining the gardens, the swimming pool, heating and cooling the house, and maid services required to keep a large house in good order. Learn to live within your means.

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:

• Forego that daily cappuccino. Brew your own coffee.
• Take your lunch to work.
• Cancel your cable TV. Start reading books from the library.
• Regularly reevaluate your insurance. You may be able to save some money by comparing rates.
• Skip expensive restaurant meals and cook at home.
• Review your telephone bill carefully and cancel unnecessary services.
• Stop buying junk food, soft drinks, and snacks.
• Go on a diet. Cut what you eat by one third. By becoming slimmer you will also avoid medical complications from being overweight such as cardiovascular diseases, high blood pressure, and diabetes.
• Check with your doctor or pharmacist to see if you can replace some of your prescription medicines with less expensive generic medicines.
• Form a car pool and save on gas.
• Clip coupons. Many grocery stores will double coupons up to $0.99
• Take advantage of sales when buying electronic equipment like computers and cameras.
• If your work permits, work from home at least one day per week to reduce your commuting costs.
• Work two extra hours per day to reduce your workweek from five days to four days. This also reduces commuting costs.
• Have a garage sale and get rid of the clutter in your home.
• If the values of the homes in your neighborhood have gone down, you may qualify for a lower assessment and lower property taxes.
• Reduce your heating and air conditioning costs by closing unused rooms and keeping the rooms slightly cooler in the winter and slightly warmer in the summer. Wear appropriate clothing for the season.

Start saving
Whether you are planning for retirement or a nice vacation, you need to learn how to save your money, but be patient. It takes time for your savings to grow.

• Create your savings goals
• Develop a spending plan
• Track spending weekly
• Divide paychecks between checking and savings
• Transfer funds automatically between checking and savings
• Save for retirement at work and take advantage of employer contributions
• Put tax refunds, bonuses and raises into savings
• Build home equity by paying down mortgage loans

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.

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