3 Steps To A Better Budget

Budgets have played an important role in helping families manage their personal finances for generations. The way people create and use a budget today might be very different than years ago, but the end result is the same: knowing how much money is coming in and how much is going out. Budgets can range from very simple to very complex.

A truly functional budget will consider expenses you incur on a regular basis as well as those that happen less frequently (insurance, taxes, seasonal expenses). In addition to expenses, your budget should include contributions to savings and miscellaneous expenses. When you have a budget that accounts for every dollar you earn, you are truly managing your money in the most efficient manner. All to often people make the mistake of creating a budget that accounts for “bills” only with any remaining money automatically considered “extra”. What do most people do with extra money? They spend it, of course. For this reason you must account for all of your earnings and financial obligations in your budget, least you waste it through unnecessary spending. This type of budget is especially important for individuals trying to pay off debt or recover from a bad financial situation. Here we offer step-by-step instructions on how you can establish a budget that will help you reach your financial goals.

Step 1 – Track Your Income

The first step in creating a budget is to determine how much money you are working with and when this money is available to pay expenses. If your pay or pay dates fluctuate, work with the minimum amount you anticipate. Add all income for the month to establish how much money you have available to put toward expenses.

Step 2 – Track Your Expenses

Start by listing reoccurring expenses such as your mortgage or rent, car notes, utility bills and credit card payments. Most of these expenses are the same each month and due at or around the same time. Next include the average amount of money spent on groceries, gas, memberships and “spending” money.

Make sure you account for everything you routinely spend money on to get an accurate figure of how much money you need for living expenses per month. Next consider other expenses that are not due monthly. Insurance premiums, taxes and other expenses that are not paid each month must still be accounted for in your budget. Divide the total amount paid per year by 12 to see how much money you should be setting aside in order to meet these obligations.

Step 3 – Adjust Your Budget

Now that you know how much money you have available and how much money you actually need to live, you can compare the two figures to see where you stand. If you have money left over after paying all of your bills, you must create a place for this extra cash. If you are trying to pay down debt, this is an excellent place to apply extra money. Lucky enough to be debt free- stash this money in savings to be applied to a number of financial goals.

If you find you have more expenses than available income, you have a bit more work to do. This is where you can learn how you can cut costs or increase income to balance out the budget.

Many people feel that following a budget is too restrictive, that it somehow takes away from your ability to manage your own money. In truth, the opposite is true. Establishing and following a budget will help you track where you are spending money and pinpoint where you can make changes to improve your personal finances.