The basics of budgeting

The basics of budgeting in 2022

The basics of budgeting. Overspending can occur if you do not have a clear understanding of how much money comes in each month and how much money is spent. And if you consistently spend more than you make, you may accumulate credit card debt, which can be difficult to repay.

So, if you find yourself pinching pennies at the end of the month, it may be time to examine your spending habits and tweak (or create) your budget. Creating a budget that you can stick to may eliminate the need to Google “cheap dinner ideas” every month.

What Is a Line Item Budget?

Depending on where you look, you can find a wide range of budgeting information and advice. Some advocate the 50-20-30 rule, while others swear by the envelope method. While these can provide flexibility and a solid structure for your budget, if you’re looking for specific insights, it may be worth beginning with a different approach that provides more granular detail into your expenses and spending habits — a line item budget.

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Line item budgets work by grouping related costs together and creating a well-organized flow of funds. They also track income and expenses, providing a more comprehensive and accurate financial picture.

What is Considered a Line Item?

A line-item budget at its core is a list of expected income streams and pre-planned expenses expected over a specific period of time. A line item is simply one of the items on that list. For example, a line item budget that calculates income from a salaried job and a rental property, and expenses for a cell phone, car insurance, and a music subscription would have a total of 5 line items. A line-item budget can have as few or as many line items as needed, and they’re often categorized by type to help keep the budget organized.

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What are the Advantages of Using a Line Item Budget?

One of the biggest pros of using this kind of budget is the ease with which they can be created. With just a few clicks on a spreadsheet, you can establish a basic structure and begin to fill in the data that needs to be recorded. And as priorities change, the budget can be changed just as easy to meet those new needs.

Another major advantage is that it’s easy to understand. Creating a basic list of categorized income and expenses doesn’t require any specialized accounting degree to decipher. It provides an easy-to-read, at-a-glance view of what to expect from your expenses in a week’s, month, or year’s time. And specific amounts are clearly displayed on each individual line. Those looking for budgeting for beginners’ tips may want to consider a line item budget for these two benefits.

What are some Downsides to Line Item Budgets?

Line item budgets rely on fixed and steady income and expenses for accuracy. They can work well for managing predictable finances, but if a budget contains line items that fluctuate, it may not balance properly and can provide inaccurate calculations. For instance, a budget with a line item for income from a candle business may be accurate if the same number of candles is sold each month, but if the candles are sold during the holiday at a discount, the income would not match the preset number on the line budget, and the final calculations would be incorrect.

Another disadvantage of line-item budgets is that they are rigid. It’s not uncommon to change spending habits throughout the year to fit changing needs, but those changes aren’t automatically reflected in a line-item budget. Spending adjustments may require extensive budget rewrites in order to accurately capture a new spending plan. Anytime financial goals change, with a line budget it requires reviewing and adjusting everything line-by-line in order to stay current.

Budgeting: Is It Worth It?

Budgeting can seem tedious. After a long day (or week) at work, the last thing you want to do is spend more time in front of a screen plugging in data and recording how much you’ve spent.

But tracking your money can be a powerful exercise. Tracking your spending can give you direct visibility into your habits and when you understand where your money is going, you can feel empowered to make adjustments.

One way that can help you get excited about budgeting? Changing your mindset. Instead of thinking of budgeting as a series of spending restrictions, you could think of it as a tool you can use to give you the freedom to spend money on what is most important to you.

Setting financial goals can provide a structure to help you build out your budget and plan for the future. So, whether it be saving for retirement, planning a wedding, or jetting off on a trip overseas, having and sticking to a well-crafted budget can help you get there.

It’s also worth noting that your budget is a living document. It’s okay to make changes. As you adjust your goals or experience changes in your income or lifestyle, you can, and should, make adjustments and changes to fit your new needs. Your life isn’t stagnant and your budget shouldn’t be either.

The basics of budgeting for Personal Finance

Typically, line-item budgets are used by small businesses to track their earnings and expenses and compare them from year to year. They lend well to financial analysis, allowing business owners to easily target areas of their business where they may potentially reduce costs — and where there might be room to grow the company.

While businesses typically have different needs than households or other personal budgets, there are cases when creating a line item budget could be helpful in personal finances, too.

Just as they give small businesses insight into opportunities to grow the business or reduce expenses, the same could be said for using a line-item budget to manage your personal expenses. Outlining each source of income and expense can reveal personal spending habits and opportunities to reduce expenses.

The specific insights you gather from a line-item budget, and the changes you make will ultimately depend on your personal goals and overall financial situation.

Deciding What to Include in a Line Item Budget

Deciding to create a line item budget is just the first step. Next, consider which categories are most important for you to include. A personal budget is just that — personal.

Everyone’s financial situation is different, so this list is not the end-all-be-all solution, but here are a few high-level categories you may want to consider.

Bills and Utilities

This category is fairly self-explanatory — after all, everyone’s got bills to pay, right? Things worth listing in this category might include water and electricity bills; cable, internet, or phone bills; or any other monthly bill you have on your expense list.

Education

If you are currently attending school, or have kids, you’ll likely want to consider including things like tuition and fees, the cost of books and other supplies, and any other expenses directly related to education costs.

Entertainment

This one is a little broader and can be highly customized depending on personal spending habits. Do you have a subscription to a streaming service? Do you have an annual subscription to a magazine?

Tickets to the movies, museums, or a concert could also be included in this category. Depending on your hobbies and interests you may find you can expand with additional detail.

Fees

Record all of the fees charged to your accounts. A late fee on a delayed credit card payment? ATM fees? Add ՚em here. You could add HOA fees and others to this category as well.

Food

Depending on your eating habits you could split this up even further into categories like groceries, snacks, and dining out.

Home

Think of things like your rent or mortgage as well as expenses for maintenance and upkeep of your home.

Medical

Expenses for medications, health, dental, or vision insurance, and co-pays can all be included under this category.

Personal Care

Things like toiletries, vitamins, and beauty supplies would fit into this category. Hair cuts, trips to the nail salon, and massages could be included as well. If desired, you could also include the cost of other self-care practices, like a subscription to a meditation app or exercise classes.

Services

Do you pay for any regular services? Depending on your spending you could include things like dry cleaning services, the cost of having a housekeeper, or the fee you pay your babysitter for a night out.

Shopping

Heading to the mall? Shopping expenses like clothing and toys, and even gifts for others, could be added here.

Taxes

If you’re a full-time employee, be sure to note the taxes being taken out of your paycheck. If you are a freelancer or independent contractor, note quarterly taxes.

Auto and Transportation

This is a catch-all category for things like your monthly metro pass, gas, car insurance, auto loan payment, and general maintenance on your vehicle.

Travel

Add all costs associated with your next great trip here. Things like hotels or lodging, air travel, taxis, travel insurance, and tickets and admission for excursions and seeing the sights.

If you’re road-tripping, you could include the cost of gas and other car-related expenses for the trip here too. Also worth including is the cost of food while on the road.

Income

You’ll probably want to include all sources of income, not just your regular 9 to 5. If you’re budgeting as a couple, you can include the income for both partners. Add income earned from any side jobs or passive income opportunities, too.

Investments

Add your contributions to all investment accounts including a 401(k), IRA, 529 accounts, or other brokerage accounts.

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