Six easy steps to create a realistic budget
If you have no idea where your money is going each month, you might find yourself over-drafting, over-spending, and therefore, over-stressing. If that’s you, you may want to consider a budget. Below are six easy steps to create a realistic budget.
Step 1: Determine Your Income
The first step in creating a budget is to determine your actual income. It’s best to use your net income (total-take-home-pay), vs. your total salary as you want to make sure all deductions are subtracted like Social Security, taxes, 401(k), flexible spending account allocations, etc. When determining your income, include any extra funds that come your way throughout the year, such as freelance pay, social security checks, bonuses, alimony, child support, interest dividends, rental income, etc.
Step 2: Calculate Expenses
The next order of business is figuring out exactly how much you’re spending each month. It’s helpful to categorize your spending so you know where you can make adjustments. Doing so will help you identify what you are spending the most money on, and where it might be easiest to cut back.
Begin by listing all of your fixed expenses. These are expenses that stay relatively the same each month and are required parts of your way of living. These may include regular monthly bills such as rent or mortgage, electricity, car payments, trash pick-up, phone payments, internet, etc.
Next, list all of your variable expenses. These are expenses that change from month-to-month such as gas, groceries, entertainment, eating out, gifts, etc. This is an area where you might find opportunities to cut back and allow you to save.
If you are struggling to calculate your monthly expenses, a great place to reference are your credit card statements, bank statements, receipts and financial files.
Step 3: Set Your Goals
Before you start analyzing the information you’ve tracked, make a list of financial goals you want to accomplish, both short and long term. Short-term goals are goals you want to accomplish in the near future and should take no longer than a year to achieve. Long-term goals are goals you want to accomplish further in the future, like saving for retirement which takes more than a year to reach. Your goals don’t have to be rigid, but identifying your priorities before you start planning can be helpful. For example, it may be easier to cut spending if you know your short-term goal is to reduce credit card debt.
Step 4: Total Your Income and Expenses
If your end result shows more income than expenses, you are off to a good start. This means you can prioritize the excess of your income toward savings and to pay off debt. If you are showing greater expenses, than your income, don’t panic. It just means some changes will need to be made to get out of the ‘red’ as quickly as possible. Here are 5 get-out-of-debt-steps to financial freedom.
Step 5: Make a Plan
If you have accurately identified and listed all of your expenses, you can start to see where you have money left over, or where you can cut back, to put money toward your financial goals. The ultimate goal would be to have your income and expenses equal one another, or your income be greater than your expenses. If you are in a situation where expenses are higher than your income, you should look at your variable expenses (outlined above) to find areas to cut. Since these expenses are typically non-essential, it should be easy to cut a few dollars to bring you closer to your income.
Step 6: Record Spending & Track Progress
It’s important that you review your budget on a regular basis to be sure you are staying on track. The best wat to stay on top of your budget is to record all of your expenses and income. Having to input expenses will cause you to think twice before splurging, and it’s especially satisfying and motivating to record when you’ve met savings goals.
“A budget is telling your money where to go instead of wondering where it went” –Dave Ramsey
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