Money Management: Creating a Budget, Part 1

Jun 27, 2007 - A budget is merely a means of exerting some control over your finances. And you've decided that's exactly what you need.

To take control of how much you spend and when, and prepare better for the future, you can make a budget with a little analysis and planning. To make the budget that you'll stick to, follow these key steps.

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How Much do you Spend?

The first step to creating an effective budget is accurately taking stock of your habits now. What bills do you have? How does your money get spent elsewhere?

First, make a comprehensive list of your necessary expenses. Look at your past bank statements or check registers, and compile a list of the following:

  • Housing/Utilities: Includes mortgage/rent payments, insurance, taxes, electricity, gas, and water
  • Transportation: Includes car payments, insurance, gas, routine maintenance, public transportation, and regular or anticipated air travel
  • Household: Includes groceries, laundry/dry cleaning, cleaning supplies, home improvements, and clothing
  • Communication: Includes land-line phone, cell phone, and internet
  • Health/Beauty: Includes medical, dental and vision expenses, haircuts/salon visits, nutritional supplements, make-up, etc.
  • Debt: Includes credit card payments and other loan payments
  • Entertainment: Includes cable/satellite, regular lessons, club memberships, dining out, attending bars/clubs, and other parties
  • Other Expenses: Includes things like child care, investments, vacations, gifts, and spending money

Depending on your career, family and other circumstances, other expenses can encompass a lot of thing. Are you attending school? Do you have hobbies you regularly spend on? Allowances for the kids?

To supplement this list, track your expenses for at least a month. You can do this in any way that makes sense for you – your checkbook ledger, a notepad in your bag or purse, or worksheets you can find online. Record EVERY purchase.

After a month, combine your lists of expenses and purchases. Determine how much you currently spend a month. This is your starting point.

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What are your Priorities and Goals?

After compiling your spending and expenses, you may be feeling a bit overwhelmed. But don't stop there – this painful step is the first in getting back on track, and maximizing your income month to month.

The next step is determining two things. First, what are your goals for the long-term? Do you want to have a set amount in savings for emergencies and future purchases? Do you want a nice retirement nest-egg? Do you simply want more money month-to-month? Write these goals out. These should be your guiding principles as you create your monthly budget.

Your second question is priorities. What things do you spend money on now that you don't need? What things should you be diverting more money towards? These are very individual and personal questions. How you answer them determines the next planning in your budget. And because you take a close look at what you want and need, your budget is not some impersonal, rigid and painful task. It's a reflection of you.

Budgeting and financial experts recommend some spending directions:

  • At least 10 percent of your income should go to savings (with automatic direct deposit so you don't get tempted to dip into this). Savings can mean a savings account, or long-term retirement savings in IRAs or 401(k)s.
  • If you're saving for something specific, like a car or college education, another 10 percent of your income could be saved.
  • Another 35 percent of income should be used for housing and utilities.
  • The remaining 45 percent (or more)? Discretionary money for the rest of your expenses and the “fun” things you wish to purchase.

This discretionary amount is where you must prioritize, directing your money towards the things you want the most.

Continue reading for the next steps in the budgeting process, debt reduction and spending reduction.

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Money Basic - Personal Finance

Releasing the Inner-Millionaire in You

Money Management Practices Worth Following

Money Management: Why Budget?

Money Management - Creating a Budget (Part 2)

Money Management - Creating a Budget (Part 3)

How Much Money Will You Need to Retire?

What's Your Investment Personality?

Keeping Your Eye on the Big Picture

Do Yourself a Huge Favor: Save 10%

An Emergency Reserve Account

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