Rocket Scientists would never begin construction on a new booster rocket without a detailed set of design specifications. Yet most of us go blindly out into the world without an inkling of an idea about how we are spending our money. This is why having a budget is so important.
A budget is crucial to getting us to our desired financial goals, whether it is a home, a new car, retirement or an educational endeavor. Without it we will drift along in the sea of financial ambiguity, potentially ending up stuck on some distant reef well below our financial goals.
A budget is not a financial starvation diet and approaching it like it is will not work for the long haul. A budget is a well thought out plan in which you (and your partner) make reasonable monetary allocations for food, clothing, shelter, utilities and insurance, savings, entertainment and the occasional luxury item.
So let’s look at how to create a budget.
Calculate your expenses
Calculate all payments you are required to make each month. This will include credit card payments, gas, water, groceries, cable, Internet, car payments mortgage payments, and other monthly fees and dues. Now, add up the costs to get your total monthly expense. The total may vary depending on the month, like you may have a higher electric bill in the winter, but for the most part it will be about the same. Consider rounding up to the nearest ten dollars so that you have a little bit of a buffer in place.
Determine where you stand
Determine your household income by adding all up all monies received monthly. Once you have that total, compare it with the total you calculated from your expenses. This will let you know whether you have plenty of money to pay your bills, or not enough. If don’t have enough to pay your monthly bills, you need to increase your income or cut your spending.
Know your financial goals
Know exactly what your financial goals are, when you want to achieve them, and what it will take to do so. Depending on how much you save, you may need to adjust the time frame for achieving your goals.
Evaluate your spending
Keep track of every penny you spend for one month. Most likely, you will be shocked at what the itty-bitty expenses add up to. Take the total you spent on just one unnecessary item for the month, multiply it by 12 for months in a year and multiply the result by 5 to represent 5 years.
That is how much you could have saved AND drawn interest on in just five years. That is the exact reason why all of us need a budget. If we can get control of the small expenses that really don’t matter to the overall scheme of our lives, we can set ourselves up for financial success.
Cut your spending
Eliminate or limit unnecessary spending. For example, cutting what you spend on lunch from five dollars a day to three dollars a day on every work day in a five day work week saves $10 a week… $40 a month… $480 a year… $2400 in five years….plus interest–And you still get to eat lunch everyday. There are a lot of places to cut expenses if you look for them.
Follow your budget
The most important part of having a budget is following it. I can pretty much guarantee that it will be challenging in the beginning weeks, but fight the urge to stray. Save what you set out to save and spend what you set out to spend. It is only through this type of control will you reach your financial goals.
Image by ZachKlein
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