When you think of budgets, many often relate it to an activity commonly done with businesses to help plan for an upcoming year. While these are very important for an organization, budgets are also vital for individuals to help keep track of their personal finances. The overall goal of these personal budgets is to minimize expenses and maximize savings.
Creating a personal budget may seem like a difficult task initially. However, when you break the process down into simple steps, you will find that having a budget can make your financial stress level decrease substantially.
The first step is to gather all of your personal financial information such as bank statements, investment account statements, paycheck stubs, utility bills and any other bills or receipts. This will help to give you an overall feel for how much you are bringing in each month and how much you are spending.
The next step is to record all of your sources of income and expenses into a spreadsheet or personal budget calculator. This step can be as simple or as detailed as you would like. If you are self-employed or have additional sources of outside income other than the regular paycheck, be sure to include these amounts as well. For the expenses, record a list of expected bills and payments that you plan on incurring during any given month. These include mortgage payments, car payments, utilities, groceries, insurance, entertainment, etc.
Next would be to break your expenses into two categories, fixed and variable. Fixed expenses are those that tend to remain consistent from month to month such as the mortgage payment, car payments, and cable/internet bills. Variable expenses are those that change on a monthly basis and include grocery bills and entertainment expenditures. This step is important in that it allows you to see a breakdown of necessary versus discretionary expenses.
After the above steps have been completed, it is time to total your monthly income and expenses to determine the end result on whether or not your income is higher than your expenses. If your end result shows more income than expenses, you are off to a good start. This means that you can now devote that extra income to a retirement savings account, a college savings account for your children or grandchildren, or paying more on credit cards to eliminate any existing debt.
If you are showing more expenses than income on your bottom line, this indicates that changes will be necessary to adjust your spending habits. Take a look at your breakdown of fixed and variable expenses to determine where changes need to be made and where cuts can be made. For instance, if your entertainment expenses for dining out are relatively high, try limiting dining out to one night a week or choose to make dinner at home instead.
Lastly, it is very important to keep an updated budget and to review this on a monthly or quarterly basis to ensure you are staying on track. After the first month especially, take some time to compare your actual expenses to your budgeted amounts to determine if any adjustments will be needed for the months ahead. This will show you what you did well and which areas you need to improve. So go ahead and take that next step to greater financial security and create your own personal budget.
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