You’ve probably heard that creating a budget is the key to making your financial dreams a reality. Managing how much money comes in and goes out each month can certainly set you on the path to financial success, but how exactly do you create a successful budget?
Follow these easy steps, and you’ll soon find yourself the proud owner of a balanced budget.
1. Total Your Expenses
This is the time to get real and bare all of your financial laundry. Pull out the past year’s bank statements, receipts and bills, including intermittent charges like insurance, auto and home repair and gifts. Also include incidental expenses, many of which you may pay for with cash.
On their own, minor charges seem insignificant, but they add up quickly. Get a true total of your spending by keeping a financial journal for a month and recording what you spend on miscellaneous items like coffee, quick meals and tips.
When you have all of the necessary data, add your expenses up and divide by 12, which will give you an average of your total monthly expenditures. Tack on a 10 percent cushion to cover the unexpected. For instance, if you determine that you spend an average of $2,500 per month, bump the total up to $2,750.
2. Determine Your income
In addition to your regular net salary, add to your take-home pay any additional money you receive, such as alimony, child support, rental income, interest and dividends, cash gifts and tax refunds. If you have a regular side business or often sell items online, include a monthly average of that income.
3. Do the Math
Discover if you have a monthly windfall or shortfall by subtracting your expenditures from your income. If the figure is negative, you have a budget deficit that is likely eating up your savings or causing you to reach for plastic. If the answer is positive, you have a surplus that you may be spending on incidentals, rather than paying down debt or saving.
4. Balance Your Budget
If you have a positive cash flow each month, you can skip to number 5. On the other hand, if you’re breaking even or in the negative, you must either slash expenses, bring in more income, or both.
To lower expenses, look to your incidental category first. If you’re $50 negative per month and spending $50 a week on unnecessary items, cutting the incidental spending to $15 a week will eliminate your shortage and give you approximately $90 ($1080 per year) to pay down debt and save. If you can’t cut enough from this category, look to your bigger ticket discretionary spending and consider reducing certain expenses. For instance, if you pay for a premium cable package but don’t actually use it, lower your cable bill or get rid of it entirely.
After making all necessary cuts, if you still have a shortfall or an insufficient amount of excess money, find a way to bring in additional income.
5. Reduce Debt
Now that you know how much money remains each month, you can earmark a certain percentage for paying down debt like credit cards and student loans. Avoid attempting to pay off all your debt at once. This is generally unrealistic and is likely to discourage you. Stay encouraged by focusing on one debt at a time, and start with the smallest debt first.
6. Set Savings Goals
Paying off debt is definitely important, but saving is equally so. Having an emergency fund allows you to deal with life’s inevitable unexpected expenses without resorting to credit. While the standard advice is to save 10 to 20 percent of your income, this isn’t always possible. The key is to take advantage of the excess in your budget and save it, no matter how minimal it is. As your income grows, increase your monthly savings.
7. Record Progress
A surefire way to guarantee that you stay on track with your budget is to record your income, expenses, debt reduction and savings. Try using a tool like Mint to track your financial achievements. Seeing your savings account grow and your debts shrink will keep you motivated and less likely to splurge.
Devise a budget and stick to it most of the time, and you’re bound to find yourself in the black and headed toward financial freedom.
Julie Bawden-Davis is a staff writer for SuperMoney. Her mission is to help fight your evil debt blob and get your personal finances in tip top shape.
Copyright © 2013 Julie Bawden-Davis
Photo: Tax Credits