How to Allocate Money for Budgeting

How to Allocate Money for Budgeting
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There are few things as important to your financial security as creating a household budget. After all, a person's wealth is not truly defined by their income, but by how they spend, save and invest the money they earn. By understanding your current spending habits, household expenses and income, you may devise a successful budget that allocates a specific amount of funds to every area of your life — from your mortgage to your morning cup of coffee.

Track your total expenses for one or two months to get a clear picture as to where your money is going. Seemingly insignificant expenses add up quickly, so don't leave anything out.

Determine your total monthly household income. This process is easy for employees who earn a set amount of money each week. If you are self-employed or are paid in tips, track income over a few months to determine an average.

Enter your income and expenses into a budget management program, a spreadsheet, or onto a piece of paper. Your goal is to determine the current allocation of money in your household for each category in your expenses. Expenses should include: housing and debt, taxes, insurance, living expenses and savings and investments.

Divide the total amount in each category by the total monthly household income to determine the percentage you're currently spending in each category. For example, if your total monthly spending is $5,000 and your housing and debt expenditure is $2,000, then the current total allocation for this category is 40 percent.

Compare the allocation amount for each category with your ideal allocation amounts for each category on your worksheet. Financial experts recommend allocating 30 percent of your income for housing and debt, 25 percent of your income for taxes, 4 percent for insurance, 15 percent for savings and investments and 26 percent for living expenses.

Evaluate the data to see where expenses may be reduced or eliminated in categories where too much income is being allocated. Keep your monthly expenditures within the allocated amounts to stay on budget and meet your financial goals.