Many of us are in the habit of spending money without a plan and hoping that the next paycheck arrives before our money runs out. If living within your means is important to you, then this is a habit you need to break. A good way to do it is to set up a household budget. Sometimes, however, the only thing more difficult than living within your means is setting up a household budget. If you use these simple tips, setting up your budget should be a relatively painless process. Generally •Be realistic – creating a budget should be an honest exercise that helps you get a handle on your spending •When setting financial goals, be challenging enough to give yourself some incentive and keep you motivated, but not so challenging that you can never be successful •Understand the difference between income and wealth – the former is what you get paid each month and the latter is what you create over time •Budgets not only help you develop good spending habits, they can also help you create wealth by helping you spend less than you earn •As you prepare to make a budget, start saving your canceled checks, paid bills, credit card statements, and receipts. The more expenditures you can account for, the more you'll know about your spending habits. Determine Your Monthly Cash Flow? •Compare your income to your expenses to find out how your money comes and goes on a day-to-day basis •Track your income and expenditures for a period of one to three months. If nothing else, this exercise will confront you with evidence of how you spend money and force you to consciously make some judgments about it. •To calculate your average net monthly income, list all sources of revenue throughout the year, deduct taxes and any retirement contributions, and divide that number by 12. •Create a list of average monthly expenses. Include the following: o Charitable giving o Consumer debt payments – e.g., non-current credit card balances, personal loans o Mortgage or rent payment – include real estate or sales taxes o Utility payments – e.g., electricity, water, gas, phone, internet cable o Insurance premiums – e.g., life, health, auto, homeowners, renters o Car payments o Car expenses – e.g., gas, oil changes, tires, scheduled maintenance o Food – e.g., groceries, school lunches o Healthcare – regular doctor visits, regular prescriptions o Personal – clothing, haircuts o Entertainment – e.g., dining out, movies, vacation Figure Out Where You Stand • Once you determine your cash flow, you'll find yourself in one of three situations. • If you spent more than you made, it’s a clear sign that you are in trouble or that there is trouble ahead. You've either been dipping into savings, borrowing money, or buying on credit. There are times when you have no choice, and you can get away with this for a while. But if spending more than you make is a regular practice, it's bad money management that will cost you dearly in the long run. • If your income and expenditures are roughly in balance, it means you’re making it from month to month without getting into a hole. Before you start patting yourself on the back, go back and check your goals. If wealth creation is the goal, then you still have work to do. Also, take a look at how you spent your money – does your spending reflect your priorities? Remember that there’s more to good money management than balancing your checkbook. • If you made more than you spent, that’s great – maybe. Your cash flow statement should include savings and investments, so technically you shouldn't have any money “left over.” If you end up with money that is unaccounted for, it’s either an accounting error or a failure to set up a savings or investment account. • Knowing where you stand is vital to knowing where you need to go. And regardless of whether your primary goal is to eliminate debt or to create wealth, be on the lookout for ways to increase your income, eliminate wasteful spending, and cut costs. The Budget • Once you’ve determined your goals and know your current cash flow, it’s time to create your budget • At the end of the day, budgeting is really just an exercise in setting priorities. Whether you are trying to live within your means, pay off debt, or grow your investment account, you’re going to have to make some decisions because to spend money on one thing means you can’t spend it on something else. Budgeting is as simple as looking for places where you can save money and allocating it to different categories where it’s needed or to savings. • If your old school, pencil and paper may work for you. There are other options, however. Check online for free spreadsheets. Many online banking services have budgeting tools. And there are numerous online programs and software that you can buy to help you with budgeting and monthly accounting. • Remember that you shouldn’t give up everything that you want just because you’re trying to save money. An almost sure-fire way to make a budget fail is to NOT budget for any fun stuff. The key is to do it in moderation and to set limits that you will abide by. • Take your budget seriously, and review it periodically to make sure it is still realistic under the circumstances and is still moving you toward your goal. Savings • The ultimate goal of budgeting is to save money and create wealth. One way to help make this happen is to make saving automatic by using direct deposit or some other form of automatic withdrawal. The less you have to do to put away a few dollars every month, the more likely it is that you will do it consistently. • And remember, there is no such thing as “disposable income.” Money left over at the end of the month should not go into a discretionary spending slush fund. Instead, sock it way in savings or find a way to invest it. Conclusion • When it comes to budgeting, there are many ways to make it work. The key is to find a system that works for you and stick with it.
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