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How to Set up a Budget

What is a budget? A budget is a personalized, customized financial system that keeps track of your finances.

10 Advantages of a Budget

· Shows how much funds you have and where it is being allocated.

· No more guesswork; clears your mind from an over-saturation of information.

· Compels you to take control of your own money and practice money management.

· Keeps you from spending money before it's earned.

· Eliminates debt and prevents overspending.

· Encourages you to save.

· Impacts you to pay your bills on time.

· Set realistic expectations.

· Records your transactions in one place, and keep your finances organized.

· Write it down! Looking at the budget creates a lasting impression in your mind and will motivate you to follow through with it.

Tools to Create the Budget:

Software

Computer technology has introduced us to some very sophisticated personal finance software. You can purchase software that will do the math for you. They're hassle free and takes the stress out trying to manipulate figures. Costs of software vary, and there's a small but good selection to choose from.

Simply register with the vendor and the program installs on your home computer in minutes. Many of the features are user friendly, and navigation is straightforward. All that is required is simply imputing your figures; the rest is done for you automatically and in relatively short order. Create charts and reports to detail income and expenses on an ongoing weekly or monthly basis. Check out www.microsoftmoney.com and www.quicken.com

Spreadsheets

Spreadsheets are also great options. Here, you have the benefit of customizing your own worksheet by using appropriate categories. Spreadsheets have useful buttons to help with calculating formulas.

Forms

Budget forms can be downloaded free online. Check out http://www.foxway.com/worksheet.html and http://www.houseclicks.com/owning/budget2.html.

Notebooks

If you're not computer savvy or prefer not to use a computer for your budgeting needs, a notebook can also be effective.

Setting up a Budget

Step One

Set realistic, attainable goals. If you have a family, involve them in the process. The cooperation of your family, and their willingness to make sacrifices and compromises, is key to ensuring a successful budget. If you're single, focus on your own needs.

Set small, attainable goals, that can be achieved within a few months, like purchasing a laptop.

Then plan for medium-term goals, which can materialize within 12 to 24 months. Saving for a used car or tuition for part-time studies are good examples.

Long-term goals are usually the most lofty and most important objectives. Buying a dream home, paying for college education, and retirement are the most popular goals that people plan for.

Step Two

To create an effective budget, it's essential to determine what money is coming in, and where it's going.

Write down information on paper first, or a blank template.

Start with your monthly net income - the amount you bring home after taxes, premiums and other deductions are withheld.

Determine your true net income (exclude bonuses, commissions, investments, etc.):

If you are paid weekly:

- Multiply your net income by 52; then divide the result by 12.

If you are paid bi-monthly:

- Multiply your net income by 26; then divide the result by 12.

If you are paid monthly:

- Multiply your net income by 12; then divide the result by 12.

(Calculations are not needed if you are paid monthly. The above figures only demonstrate how figures are derived).

Remember to combine totals for two-income earners.

List income sources:

· Salaries

· Annuities

· Commissions

· Investment earnings

· Tax refund

· Social Security benefits

· Rental income

· Alimony

· Bonuses

· Revenue for items sold online

Next, account for every penny that leaves your wallet. Absolutely no exceptions! To help you remember, write purchase items on your bill. It's also helpful to have a small notepad with you at all times to document transactions.

Review your bills and list everything you've spent during the past month. Items without receipts (lottery tickets, take out food, transportation, etc.) can be estimated. Include recent credit card statements and expenditures from your checkbook.

Without tracking where the money is being spent, it is difficult to make adjustments and create a successful budget.

Step Three

Tally your income and expenses; then subtract the expenses from the income. If expenses exceed income, your spending habits must be adjusted. Find areas where you can cut back. Although it may take some time, trim expenses until it equals your monthly income. Be creative. Consider new ways to increase your income.

Alternatively, if your income is higher than expenses, you've achieved a balanced budget. Use the balance to create a special fund for savings, retirement, or whatever you choose.

Ideally, work toward generating a 3-month emergency fund. Once that is accomplished, try to establish a 6-month fund.

Essentially, the special fund is also a safety net. Illnesses or disabilities, medical bills, job loss, and emergencies can occur unexpectedly, at any time. They will inevitably cause a severe financial burden. Think ahead also about a future wedding and pregnancies.

Therefore, it is vital that you're prepared financially for unforeseen situations. A special fund that provides a 3 to 6-month cushion does just that.

The special fund can also earn interest on a savings or money market account. But without the fund, emergencies will likely be paid for on high interest credit cards. That will certainly compound your debts.

Step Four

Categorize expenses:

· Housing

· House insurance

· Utilities

· Mortgage/Rent

· Property taxes

· Cable/cell phone/internet

Vehicle

· Car payments

· Insurance

· Gasoline