Learn how to create a Budget in Simple steps!
Most people have a somewhat negative or indifferent relationship with money. We believe it’s better not to understand it, so we don’t deal with either negative or positive information. By ignoring our expenses and not having an established budget, we face financial problems, rely on credit cards as financial lifelines without even understanding the interest rates we’re agreeing to, and more—all due to not having a budget in place from the start.
I believe learning about finances and creating budgets should be part of university or high school education before graduation because it’s not just job-related knowledge; it’s life knowledge. Another reason is that our Latin American culture doesn’t emphasize early savings education or financial growth, where one could be called “rich.” Culturally, we’re used to living paycheck to paycheck, not managing money well, and always feeling financially strained.
However, there are several strategies we can use to break out of this vicious cycle of poverty. One of these strategies is called BUDGETING.
What is a Budget?
A budget is a document detailing the expected expenses and income of a company or individual. In this case, we need to understand our assets and expenses, whether individual or family.
First, know exactly what your weekly income will be. If you receive a paycheck once a month, how much is it? In the U.S., most companies pay bi-weekly, which means there will usually be two paychecks to record as income each month. If budgeting for a family, record everyone’s income. It’s important to understand whether the payment will be as W2 or 1099. A W2 employee works for a company that deducts taxes before paying, while a 1099 independent contractor doesn’t have taxes withheld and must budget to save for end-of-year taxes. Thus, budgets for W2 and 1099 employees differ.
For now, we’ll focus on employees with a fixed income every two weeks, i.e., W2 employees. Variations will be explained at the end of the article.
Part 1 – Income vs. Expenses
As mentioned, it’s essential to monitor monthly income and account for available funds. If you have additional income sources, such as child support, monthly product sales, or passive income from property rentals, all this is considered INCOME.
To keep it simple, write down all your monthly income and total it, then list all your expenses for the month. Some families have fluctuating expenses, while others have fixed ones.
The formula is: Liquid Income – Expenses = Net Income
What is considered an expense? Here are some common expenses that differ from debts and are necessities:
- Mortgage/Rent
- Utilities
- Subscriptions or memberships (e.g., Amazon, Netflix)
- Transportation (car mortgage, insurance, tickets, parking, gasoline)
- Health/Dental/Vision Insurance
- Cell Phone Payments
- Groceries
- Personal Expenses
These are essential expenses, but there are also discretionary expenses, such as:
- Eating out
- Beauty products
- Clothing
- Extracurricular events or sports
- Classes
These discretionary items can consume significant income.
When I sit with my clients and analyze cash flow, I often find that expenses exceed income, leading to credit card use and additional monthly debt. I’m not against credit cards, but one must control their lifestyle and not rely on credit cards, as this involves using borrowed money, with the bank charging interest.
Part 2 – Monthly Management
To have an appropriate budget, expenses should be less than income by at least 15%. What does this mean? Your net income should be 15% of your income after deducting expenses.
Example: Monthly Income $5,000 – Monthly Expenses $4,250 = $750 NET INCOME (15%)
When this formula is reversed and expenses exceed income, there are two problems: Either you’re spending too much money beyond your cash flow, or your income isn’t sufficient, requiring higher earnings. It’s crucial to be honest with yourself, as analyzing your monthly numbers may reveal that you’re not managing money effectively. I experienced this myself, regularly spending on eating out or buying coffee, thinking it was just $10 or $5, but multiple small purchases add up.
If your expenses are basic, with no extra payments, and you’re still negative, then your income isn’t sufficient. You may need to find a higher-paying job or an additional income source.
But what if your net income exceeds 15%? What should you do with that money? The most prudent approach is to save an exact emergency fund amount for 3 to 6 months in a savings account. Once that is accumulated, the remainder should be invested to grow. How? Investments! But that will be covered in a future topic.
Carolina vasquez
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