Planning for Expenses

Making and spending money is a big part of financial responsibility.

Managing your money requires figuring out how much money you have coming in, and how you spend that money going out. You can compare your income with your expenses and make a plan on how to spend in the future. This plan is called a budget.

Sources of Income

In most cases, income comes from having a job, but it could also come from an allowance, gifts, or government benefits (such as Social Security). Incomes tend to grow over time, but could occasionally shrink. You should always update your budget as your income changes.

Expenses

Just as fast as income arrives, money goes back out to pay for expenses. Expenses can also grow over time and will eventually include housing, utilities, groceries, phone, internet, transportation—and that’s just basic monthly expenses. There’s also insurance, healthcare, credit card bills, and clothing, among countless other expenses that are paid with income.

There are two types of expenses that are important to your budget. The first is fixed expenses that stay the same each month. These are expenses like housing, a phone bill, and car payments. The other category is variable expenses. These expenses can change from month to month and you tend to have more control over them. Entertainment, fast food, and hair products, are examples of variable expenses.

The Numbers in Black and White

There are just a few simple steps involved in getting a handle on your monthly income and expenses:

1. Record your monthly income.
2. List your fixed monthly expenses.
3. Create a list of your variable monthly expenses.
4. Compare what’s coming in with what’s going out.

If you don’t have enough income, or if you spend more than you have, your cash flow will be negative rather than positive. This can make it much harder to pay your bills and afford the things that you want to buy.

Turning a negative budget into a positive budget is the only way to make your budget work. Sometimes you will face expenses that are out of your control and will need to rely on other forms of income to pay all your expenses—avoid paying more than your income or living beyond your needs. If an emergency comes up and you have to borrow money or use a credit card to pay for it, reduce other expenses as much as you can to pay the money you borrowed back quickly.

The best way to turn a negative budget into a positive one is to reduce your spending or increase your income. Take a look at your variable expenses that are nice to have, but not necessary. These are the expenses that should be reduced first. After you get your budget positive, you should consider putting aside a little each month to help cover unexpected expenses you might have in the future.

Understanding your income and expenses will save you from a lot of financial problems in the future. A balanced budget can help you feel confident that you will have the money you need when you need it.