No, budgets are not attractive, fun or exciting in any way shape or form. They are, however, the necessary evil that can assist in getting you and your family’s spending and saving habits back on track. It’s difficult to understand why more individuals don’t already adhere to a budget, what with the economic crisis and unemployment still looming above us. It would seem that the majority of individuals without a budget either don’t think they need one, are unaware of its benefits, or simply don’t like discussing or even thinking about their financial situation. The unfortunate part about that last point is the fact that implementing a personal or family budget can help dig those individuals out of the financial holes they’ve already put themselves in. And the best part? It’s ridiculously easy to do. From writing everything down on your own to downloading or purchasing budget software, technology has made it extremely simple to execute.
The first step in creating a budget (and all these tips go for individuals to families alike) is gathering every financial statement you can find. Examples include bank statements, credit card statements, investment accounts, utility bills, and income information. The idea is to gather any piece of information regarding an expense or income for you or your family in order to process the information into a monthly average. Record all your sources of income – any type of cash flow that’s coming to you needs to be recorded. Next, create a list of monthly expenses. Examples include the mortgage payment, car payments, auto insurance, groceries, utilities, entertainment, dry cleaning, auto insurance, retirement or college savings - essentially everything you spend money on (even that daily latte from Starbucks!).
After you’ve created your list of expenses, you’ll want to break it up into two different categories – fixed and variable. Fixed expenses are those that stay relatively the same each month and are essential parts of your way of living. Examples of fixed expenses include your mortgage or rent, car payments, cable and/or internet service, trash pickup, credit card payments and so on. For the most part, these expenses are essential yet not likely to change in the budget. Variable expenses are those that will change from month to month and include items such as groceries, gasoline, entertainment, eating out and gifts, for example. This category will be important when making adjustments.
The last steps include totaling both lists of expenses and income. This is where you’ll need to make adjustments and determine what types of changes you’ll want to make to your spending and saving. If your end result shows that your income outweighs your expenses, you can start prioritizing the excess to areas of your budget such as retirement savings or paying more on credit cards to eliminate that debt faster. If you are in a situation where expenses are higher than income you should look at your variable expenses to find areas to cut. Since these expenses are typically adjustable, it should be easy to shave a few dollars in a few areas to bring you closer to your income. Once you’ve made your adjustments and have a reasonable budget to stick to, make sure you review it regularly to determine whether you are staying on track and all your numbers are up-to-date.
In addition to the steps I’ve mapped out, I’ve also put together a list of snapshot tips to help you in your budget creation and execution:
- Be honest!
- Track your spending to make sure it stays within your guidelines.
- Use software to save grief – personal finance programs have built-in budget-making tools that can create your budget for you.
- Don’t drive yourself crazy, or stop buying groceries! Monitoring your spending can sometimes lead to overly-attentive detail – don’t go overboard.
- Monitor your cash flow – it’s much more difficult to track where your cash is going, so keep those ATM receipts and watch your cash flow with more scrutiny.
- Beware of expenses that may seem fixed – do you really need that $50 bottle of wine?
- Aim to save at least 10% of your income for your future, such as investments and retirement planning.
Budgets aren’t easy to create, let alone stick to, but they are essential in getting a grip on your financial situation. Looking over this list of tips, I’m sure you’re thinking, “okay, easy enough.” But it’s not. It takes time, effort and active dedication to continually be aware of your saving and spending habits. The best part? You won’t regret it; it is guaranteed to pay off in the end. Think of your personal budget like your map and journey to financial peace of mind.
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