Managing a personal budget is truly one of the more difficult parts of life. For some people, it seems as though something always comes up that quickly absorbs the extra money in the budget during times when they’re ahead. “First the water heater, now the car needs new tires, if it’s not one thing it’s another,” people may frequently say.
How is it that someone can have extra money one moment, and be short on money quickly thereafter? Perhaps the reason for this is most of us live well above our means, and our budget often doesn’t account for “just in case” scenarios. A Credit Donkey survey found that nearly 40 percent of Americans have less than $500 in their savings, and around 41 percent do not have enough of an emergency fund to cover one month of expenses.
Even if we have an emergency fund, few if any of us have money allotted for “just in case” we see something on sale while out shopping. Impulse purchases, unplanned expenses, and overspending throw curve balls into our monthly budgets. To help budget more effectively, and reduce ups and downs that cause us to have extra funds one month and not enough the next, there are a few calculations we should all perform on a regular basis.
1. Monthly surplus/monthly income
After you pay all of your monthly obligations, how much money do you have left? This is your monthly surplus and if you divide this amount by your total monthly income, you’ll get an idea of how well you manage your finances and also, an ideal percentage of that income you can put away for savings.
When calculating your monthly obligations, be sure to include everything — all of your bills, credit card bills, your house payment, groceries, and even your magazine subscriptions. For instance, a monthly income of $5,000 and monthly expenses of $4,000 would produce a ratio of $1,000/$5,000 = 20 percent.