Making a Budget
Making a budget is an important
step toward financial security. Budgeting helps you to live
within your financial means. It allows you to know how much money you have
coming in and how much you have going out. Many people are afraid to sit down and look at these
numbers simply because they feel more comfortable NOT knowing! Ignorance can be bliss in this area,
but it can also be disastrous. If you want to start to live in a more frugal way, making a
budget and implementing it is essential.
making a budget
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- Gather up your financial information. This includes bank statements,
investment accounts, utility bills and any information regarding a source of income or
expense. For making a budget you want to be able to find a monthly average, so the more information you can
dig up the better.
- Record all of your sources of income. If you are self-employed or have any
outside sources of income be sure to record these as well. If your income is in the form of a
regular paycheck where taxes are automatically deducted you can use the net income, or take home
amount. Record this total income as a monthly amount.
- Create a list of monthly expenses. Write down a list of all the expenses
you have over the course of a month. This includes a mortgage payment or rent, car
payments, groceries, utilities, entertainment, retirement or college savings and everything
else you spend money on. (For bills that you don't pay every month like car insurance, divide the
6-month amount by 6 and add this to the monthly budget.)
- Be realistic. A budget is like a diet - Don't set impossible goals. If you
normally spend $500. on groceries each month, don't try making a budget that only allows $200.
for groceries. You will end up not sticking to your budget because you won't be able to! Similarly, making a budget that doesn't allow you any fun money will be hard to stick to because you will feel deprived.
- Break expenses into two categories: fixed and variable. Fixed expenses are
those that stay relatively the same each month and are required parts of your way of living. They
included expenses such as your mortgage or rent, car payments, cable and/or internet service,
trash pickup, credit card payments and so on. These expenses for the most part are essential yet
not likely to change in the budget.
Variable expenses are the type that will change from month to month and include items such as
groceries, gasoline, entertainment, eating out and gifts to name a few. This category will be
important when making adjustments.
- Total your monthly income and monthly expenses. If your end result shows
more income than expenses you are off to a good start. This means you can prioritize this excess
to areas of your budget such as retirement savings or paying more on credit cards to eliminate
that debt faster. If you are showing a higher expense column than income it means some changes
will have to be made.
- Don't count on windfalls. When projecting the amount of money you can live
on, don't include dollars that you can't be sure you'll receive, such as year-end bonuses, tax
refunds, or investment gains. (Don't count your chickens before they hatch!)
- Make adjustments to expenses. If you have accurately identified and listed
all of your expenses the ultimate goal would be to have your income and expense columns to be equal.
This means all of your income is accounted for and budgeted for a specific expense. If you are in
a situation where expenses are higher than income you should look at your variable expenses to
find areas to cut.
- Beware of spending creep. As your annual income climbs from raises,
promotions, and smart investing, don't start spending for luxuries until you're sure that
you're staying ahead of inflation. It's better to use those income increases to save more.
- Review your budget monthly. It is important to review your budget on a
regular basis to make sure you are staying on track. After the first month take a minute to sit
down and compare the actual expenses versus what you had created in the budget. This will show
you where you did well and where you may need to improve.
- Stick to your budget. The hardest part of reaping the rewards of making a budget
is to stay with it once you have created it. Come up with strategies for
living on a budget to help you stick with it for the long haul.
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making a budget
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