I know, I know... there's nothing more boring than creating a budget. It ranks up there with root canals for most people. I understand and I completely agree. But, that doesn't change the fact that it's an incredibly useful tool. Just do it.
I know, I know... there's nothing more boring than creating a budget. It ranks up there with root canals for most people. I understand and I completely agree. But, that doesn't change the fact that it's an incredibly useful tool in your fight for financial freedom.
-- Morgan
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Creating your first budget can be extremely overwhelming. So overwhelming, in fact, that only 40% of American families have a working monthly budget. But it’s worth the effort. Developing a budget that you can maintain over the long term has been definitively linked to building wealth, while simultaneously helping you get out of debt and cut expenses.
If you’re a first-time budgeter, here are 12 steps to make the process as smooth and painless as possible.
1. Decide to Start a Budget
If you are reading this article, chances are that you have already made the decision to begin a working budget. Congratulations! For many people, myself included, this is the hardest part. Read on to get started with next steps.
2. Know How Much You Have
If you have savings, checking accounts, investment accounts, or any other financial instruments, you will want to know how much money is in each account as well as the interest rates and expenses of each one. Make note of this information as it will become important in determining your net worth and the best use of your capital in the future.
3. Know How Much You Make
For some people, this is easier than others. Those on a salaried pay scale can easily find their monthly income. For hourly employees or those who work in a business where income may rise and fall unpredictably, this can be much more difficult. The most important consideration, regardless of how you earn your monthly income, is to determine the average monthly amount of income that you receive. A good way to do this, if you receive irregular income, is to average out the last 6 to 12 months of recurring income and use that figure.
4. Know What You Owe
Determining your monthly recurring debt payments should be your next step. This should be fairly simple to do, as long as you have stopped incurring additional debt in the short term. If you haven’t been able to break your dependence on credit cards, that’s okay, as building a budget will act as a first step for your next financial priority which should be getting out of high interest consumer debt.
To find out what your monthly recurring debt payments are, calculate the total amount owed on each debt account as well as the minimum monthly payment. This includes car loans, mortgages, credit card debt, student loans, and all other debt that your family pays on a monthly basis.
This will provide you with the first few line items in your budget, and will allow you to determine your net worth.
5. Determine Your Net Worth
Once you know how much money you have and how much you owe, you can easily determine your net worth. Just subtract what you owe from what you have, and you will derive a number. This number will tell you the value of your financial resources.
6. Determine Your Average Recurring Monthly Expenses
This can be the hard part for many people. The best way to determine your monthly expenses is to make a stack of household expenses for a month. Keep your receipts, your utility bills, and any other expense that arises during a one month period, and divide these bills into categories. The categories can be as general or as specific as you want them to be.
7. Enter this Information into a Database
It used to be, if you had a budget, you had an old school paper ledger. Things have changed for the better for all of us new budgeters. Software programs like Microsoft Excel and online budgeting tools like Mint, You Need a Budget, and Mvelopes have made it much easier to take the results of your first few steps, and develop a highly adjustable and sustainable long term budget.
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Some of the online sites like Mint.com are really great. I highly recommend that you check them out.
-- Morgan
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8. Look at the Bottom Line
After entering all of the above information, you will discover the most important number in your budgeting process - the bottom line. This number will tell you whether you are overspending or underspending. Ideally, during this step you will find that you are living within your means, and maybe will even have a little left over on a monthly basis. On the flip side, you may determine you must make adjustments to your monthly expenses in order to live within your means.
9. Make Adjustments Accordingly
If the bottom line of your budget proved that you are overspending your monthly income, you will come to the most difficult step - making cuts to your monthly expenses. There are tons of resources here on Money Crashers that will teach you to be smarter with the income you have, help you cut your recurring monthly expenses, and establish your financial boundaries for personal budget planning.
10. Adjust Categories Based on Reality
Life is full of surprises. Food gets more expensive, gas prices rise, and rent can get hiked when you least expect it. Each time you notice inflation creeping up on your expense categories, get a raise at work and begin to earn more money, or worse, suffer a financial setback like a pay cut or job loss, you must adjust your categorical expenses based on the realities of the world around you.
11. Pay Yourself First
Depending where you are in your budget, based on your bottom line, you may want to add a few extra line items to your monthly expenses. These may be monthly dispersals to a savings account like ING Direct or Ally Bank, Roth IRA, 529 college savings plan, or other savings vehicle. Moving money into savings and treating it like a recurring expense will allow you to slowly build up your savings without feeling like you must make these deposits from what is left at the end of the month.
12. Track, Monitor, and Be Disciplined
Keeping track of your budget takes an hour or so a week. But this will save you a lot of time in the long run. Once you have an established budget, you will want to keep it in check. The discipline and associated knowledge that you are making good long term and short term financial choices will provide you with a great deal of comfort, and will take you from living paycheck to paycheck to being able to see the long term results of your disciplined savings and financial planning.
Final Word
If you don’t have a budget, now’s the time to create one. By following the above 12 easy steps, you’ll be on your way to financial freedom and building wealth for the future.
Source: http://www.moneycrashers.com/how-to-make-a-budget/
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I know you don't want to do it. But it won't hurt that much... I promise. You'll feel great after it's complete knowing exactly where you stand and you'll have a much better idea of what you need to do to get where you want to go.
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Think wealthy thoughts,
Morgan Kimble
http://www.morgansmoneymatters.com/2011/02/create-budget-in-12-easy-steps.html
Like this? Take a look at my last article:
10 Strategies For Getting Rid Of Credit Card Debt
http://www.i-newswire.com/10-strategies-for-getting-rid-of/91877)
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Morgan Kimble
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Austin, TX
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877-905-4445
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Create A Budget In 12 Easy Steps
February 26, 2011 at 05:05 AM EST
