A Simple Guide to Making a Budget

by Tracy · 1 comment

Many people are resistant to the idea of writing out a budget because they think it’s a waste of time. If this sounds like you, you should know that it’s a sure-fire way for you to get a grip on where you are financially so that you can make a plan to keep yourself in the black.

Once you have a budget, you’ll find that it’s much easier to live within your means and actually start to pay off debt and be able to have the cash on hand to do the things that matter most to you. Knowing that you are in control of your finances can be an enormous stress reliever and rid you of the gnawing feeling in your gut that comes with living paycheck to paycheck.

Don’t worry; you don’t have to use a complicated system or minutely detailed spreadsheets to plan and use a budget. And the great news is, once you have the backbone in place, it’s simple to make little tweaks. The great thing is that a good budget will help make financial decisions a breeze.

Here’s what to do to plan your budget, step-by-step:

1. Set goals. Before you begin to plan, it’s important to know what your financial goals are.

  • Do you have debt that needs to be paid off?
  • Would you like to take that dream vacation or pay cash for a new car?
  • Would you like to have money put away for your child’s college education?

Many people find it extremely motivating to write down their financial goals and put them where they can see them every day. Seeing why you’re sticking to your budget makes it easy to stay focused and on track.

2. Calculate income. You need to know how much you have coming in before you can decide how to allocate what’s going out. If your income is sporadic or unreliable, you’ll want to use the lowest amount that you realistically feel you can count on and work twice as hard to establish a healthy savings for when times are slow.

  • Wages for yourself, your spouse and any other family member who contributes to the budget.
  • Interest and dividends from investments.
  • Rental income or royalties
  • Miscellaneous

3. List all your expenses. Dig out all of your old bills and make a full list of every expense that your family has. Looking over old bank statements and credit card bills can help you make sure that you’ve left nothing out.

  • List every bill your family has regardless of how often it’s paid, this includes insurance and taxes that are paid annually.
  • Put expenses in categories (insurances, credit cards, etc.) to make them easier to calculate.
  • Don’t forget to include daily expenses like food, gas and haircuts.

4. Don’t forget savings. Pay yourself first! You should consider savings a bill just like electricity and phone and make it a priority to pay it instead of thinking that you’ll just save what’s left over.

5. Subtract expenses from income. This will give you a clear picture of the financial shape you are in.

6. If your income is greater than your expenses…and you are sure you accounted for all expenses (food, entertainment, etc.) here are some options for what to do with your extra income.

  • Put additional money in savings – this should be your first priority, especially if you have a small or nonexistent emergency fund.
  • Consult with a financial planner to find ways to invest your money so that it works for you.
  • Accelerate paying off any debts such as your mortgage, car note, student loans or credit cards. Ideally, you’ll want to pay off the debt with the highest interest rate first, although many people have had success with the snowball method, where you pay off the smallest debts first and apply that minimum payment to the next smallest debt until it’s all paid off.

7. If your expenses are greater than your income…This is a tough situation and you’ll have to do some serious thinking about how to deal with this. Making the decisions will be tough, but this is not a sustainable situation and you will have to find a solution.

Some options to consider:

  • Find ways to earn extra income. If both spouses are not working, it might be necessary for the stay at home spouse to find a part time job or way to work from home.
  • Do you have possessions you can sell to pay off debts and give yourself more breathing room?
  • Can you cancel or put a hold on unnecessary services such as cable tv or a gym membership? If you’re worried about a cancellation fee, call to ask about the possibility of being put on a hardship plan.
  • Contact your creditors to find out if you qualify for any hardship plans, reductions in interest or other programs that can reduce your monthly payment.

It may seem daunting at first, but you can make and stick with a budget! Once you get started, you’ll wonder how you ever lived without one.

Photo Credit: RambergMediaImages

Bonus Tip:

You can seriously cut your Internet and TV costs. Find a Verizon FiOS promotion code here and you might be able to spend less every month.

{ 1 comment… read it below or add one }

Oteng Dumelang April 27, 2011 at 11:47 pm

This is so powerful and it really opened my financially thinking scope wider, i wish you to keep on bringing this

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