What Should You Include in Your Budget?

Keeping a record of your monthly expenses may not be fun, but it helps ensure that your spending syncs up with your priorities and financial goals.

Sara Silano 2 July, 2021 | 4:28AM
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From big businesses balancing the books to young people saving for their next holiday, we all need to budget. Simply put, a budget is an estimation of revenue and expenses over a specified future period of time. It’s easy to say, but difficult do to because it is not very fun to limit your spending. After all, we'd all like to spend what we make. The satisfaction of instant gratification trumps prudent long-term money management. And of course, budgeting requires trade-offs. That may mean buying a small apartment rather than a townhouse so you can pay off the car loan sooner.

Morningstar.com director of personal finance, Christine Benz says that everyone--regardless of age, life stage, or income--needs a budget. She explains: “The key point about a budget is that it helps ensure that your spending syncs up with your priorities”.

What's in the Budget

First, list your current fixed and variable expenses, as well as your sources of income. Examples of fixed expenses are mortgage or rent, auto loan, taxes, credit card payment, food, utilities, child care. Personal care (haircuts, gym membership, etc.), dining out, entertainment are examples of discretionary expenses – things you don’t need but want. Sources of income are salary, pension and social security check, interest and investment income.

Needs and Wants

You can easily keep a record of your monthly expenses and income in a budget worksheet like this one. When entering your expenses and sources of income, it’s important to distinguish between a “need” and a “want”. Needs are living expenses and essentials. Wants are things you want but don’t necessarily need. A basic budgeting rule gets you to split your after-tax income into three categories:

-50 percent into spending on needs
-30 percent into spending on wants
-20 percent into savings

50/30/20 budget was devised by Elizabeth Warren’s book, called All Your Worth: The Ultimate Lifetime Money Plan.

Distinguishing a “need” from a “want” in your spending is up to you. A good rule of thumb is to think about needs as the things you must spend money on each month (fixed expenses). Wants are the things that make you enjoy life (variable expenses). Savings include investments in mutual funds, ETFs, insurance products, pension funds, etc. They help you to reach your financial goals.

A Forward-Looking and Realistic Process

Your budgeting process should start by scrutinizing your discretionary expenses over the past month(s). Benz suggests being “forward-looking” and “realistic” as you evaluate variable expenses. For example, you may have spent a lot on restaurant meals over the past month. But if getting in shape is on your list of personal priorities, you can tweak your budget to reduce your spending on restaurant meals and increase the dollars that you're allocating toward food from the grocery store so you can prepare healthy meals at home. However, it’s unrealistic to plot out a budget with no room for dinner with friends.

The next step is turning your attention to fixed expenses. “These items are necessities, but you may be able to adjust them somewhat”, says Benz. Among the areas where it's possible to reduce your fixed costs are food, clothing, mortgage payments (if refinancing is an option), telecom services, and utilities. Remember that your goal should be not only to balance your household budget but also to increase the amount you have earmarked for saving and investing each month.

Don’t Forget the Budget

Finally, put in place a plan to check your real-life spending versus your budget on an ongoing basis. “One of the key mistakes that people make when budgeting is that they create a budget and then put it in the drawer”, concludes Benz.

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Sara Silano

Sara Silano  è caporedattore di Morningstar in Italia

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