Four Important Steps In Creation Of A Budget

2019/02/25

A budget is normally used as a control and evaluation measure by companies.  Like any business, a household also incurs certain expenditures every month. Sources of income and possible areas of expenditure may be known to a certain extent. By deducting these total expenses from the income earned, an individual can arrive at the remaining balance which can either be deposited in a bankor can be carried forward to the next month. Decision as to saving or carry forward would again depend on the estimates made for the coming month.

Let Us Understand Four Steps Involved In Creation Of A Budget.

Select The Tool:

A budgetcan b easily created on a piece of paper or details can be entered in a diary/register. In case any member of the family is comfortable using a computer, Microsoft Excel can be used. By using Excel, calculations can be performed more easily.

List Down All Sources Of Income:

An individual may earn income from different sources like salary, interest, rent from house property and so on. An individual can easily estimate his/her total income for a month by adding all the incomes expected to receive in a month. Income from different sources may get realized at different times. For Instance, salary may come at the end of the month while rent may be received at the beginning of the month. Further interest incomemay be received quarterly.

List Down All Possible Expenses:

Every household has to incur various costs to meet basic necessities of life such as food, clothing and so on. Further expenses like educational costsfor children, medical expenditure, rent, transportation costs and so on are also incurred. By listing down all possible heads of expenditures, an individual can estimate total expenses expected to be incurred in a month. While some of these expenses may have a fixed amount other expenses like payment for utility bills may vary in amount. It is advisable to create a standard list of expenses. New additions to this list can be made as and when a particular expenditure is expected to be incurred. Further different costs may occur at different points of time.

Estimate For Contingencies:

It is always advisable to include a specific percentage for expenditures not known. For Instance, total expenditure estimated by a household for the month of June 2011 is $ 3000. In order to avoid any problems that may arise on account of non availability of funds at different points of time, this household maintains 10% of the total expense under the Unanticipated Expenses head. So this household estimates a $ 3,300 as total costs for the month of June. This percentage can be fixed or changed by using past information which is normally used as a basis for creation of the budget.By creating a simple list of all expenses and incomes a budget can be easily prepared.  A budget should normally be prepared in advance for a month. However, it should be adjusted as and when there is a requirement to do so.

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