#creatingabudget

Managing your money effectively through budgeting is crucial for achieving financial stability and reaching your long-term goals. Budgeting helps you track your income and expenses, identify areas where you can save money, and prioritize your spending. In this article, we will guide you through easy steps to start budgeting and provide real-life examples to illustrate each concept.

Understanding Your Current Financial Situation

Unlock the Secrets of Forex Trading: Discover a Free, Yet Powerful Learning Course at ForexFinanceTips.com! To begin budgeting, it's essential to have a clear understanding of your current financial situation. Assess your income by calculating your monthly earnings from all sources. This includes your salary, side hustles, and any other sources of income. Next, calculate your expenses by categorizing them into fixed and variable expenses. Fixed expenses include rent/mortgage, utilities, and loan payments, while variable expenses cover groceries, dining out, entertainment, and other discretionary spending. By identifying your financial goals, such as saving for a down payment on a house or paying off debt, you can better prioritize your budgeting efforts.

Creating a Budget

With a clear understanding of your financial situation and goals, it's time to create a budget. Start by setting specific financial goals that you want to achieve. Allocate your income based on these goals, ensuring you cover essential expenses first, followed by debt repayment, savings, and discretionary spending. For example, if your goal is to save 20% of your income, allocate that portion towards your savings account. Use budgeting tools and apps to help you track your progress and stay organized.

Tracking Your Expenses

To effectively manage your budget, it's crucial to track your expenses. Manual expense tracking involves recording each expense you make throughout the day. Alternatively, you can utilize expense tracking apps that automatically categorize your spending and provide detailed reports. Analyzing your spending patterns will help you identify areas where you can cut costs and save money.

Cutting Costs and Saving Money

Reducing expenses is a vital part of budgeting. Identify unnecessary expenses, such as subscriptions you no longer use or impulse purchases, and eliminate or minimize them. Look for ways to cut costs on everyday expenses, such as cooking at home instead of eating out or using public transportation instead of driving. For instance, if you usually buy a coffee from a café every day, consider making your coffee at home and putting the money saved into your savings account. Small changes can add up to significant savings over time.

Managing Debt

If you have debt, it's crucial to incorporate debt management into your budget. Understand the different types of debt you have, such as credit card debt or student loans. Create a debt repayment plan by focusing on one debt at a time. Consider utilizing strategies like the debt avalanche method, where you pay off the highest-interest debt first, or the debt snowball method, where you pay off the smallest debt first. Seek professional help, such as credit counseling, if you're struggling to manage your debt effectively.

Building an Emergency Fund

An emergency fund provides a safety net in case of unexpected expenses or financial emergencies. Aim to save three to six months' worth of living expenses in an easily accessible account. Set savings goals and contribute a portion of your income regularly. For example, if your monthly expenses amount to $2,000, aim to save $6,000 to $12,000 for your emergency fund. By consistently saving a portion of your income, you'll be better prepared to handle unforeseen circumstances.

Reviewing and Adjusting Your Budget

Regularly reviewing and adjusting your budget is crucial for its success. Monitor your budget on a monthly basis and assess your progress towards your financial goals. If you notice areas where you're overspending or falling behind, make necessary adjustments to your budget. It's important to be flexible and adapt your budget as circumstances change.

Frequently Asked Questions

Should you use Budget Billing for your utilities? Even though this could add stability for monthly payments, you may end up owing more than what you figured. There are circumstances where this can work great for you, but careful consideration is advised. First off, do you know what Budget Billing is? This is a program that some Utility companies offer. They offer you a set amount to pay each month to keep your bill constant. This is done by taking an average of what you spend each year on your electric bill and divide it by 12 months. Of course, the longer you are at that address, the more accurate they can make the monthly bill. Is This Really Right For You?

There are things to consider when thinking about signing up for "Budget Billing". The first thing you should look at, why would you want this type of billing? For many that live in areas that have a mild to moderate variance in temperatures throughout the year, this can help. However, if the temperatures have an excessive range, this can hurt you. If you live in a fairly stable climate where your temperature are mostly predictable, this should work. So let's say your annual utility bill is $2100. Divide that by 12 months and you will get your monthly payments of $175. The utility company looks at more than just one year, they do a deeper analysis of the residence history over a period of years. If signed up and living on a tight budget, this can be nice when winter comes. It will keep you from getting slammed with a $350 electric bill you weren't planning on. With the Budget Billing plan, getting surprises like that won't occur. Your bill stays steady and allows you to plan your home budget easier month to month. Budget Billing Not So Good It seems lately, that weather is doing all sorts of strange and erratic things all across the country. However, the more eastern states seem to have the most wide range of temperature changes throughout the year. If you are on the Budget Billing plan, and due to a longer and harder winter that wasn't planned. You could end up spending more money than what the utility company had averaged in for you. There is a strong possibility you will get a Balloon Payment at the end of the year. So where you were trying to avoid that big hit of a massive bill, now became more of a surprise than ever. The monthly amount the utility company set up for you, was based on months the bill was low, months it ran nominal and includes the months it ran high. So no matter if a hard long winter showed up or a hard long summer popped in, this out of the normal usage throws their averaging out the window. No matter what the reason, you exceed, you still have to pay for it. Imagine paying your $175 a month for electric, and then at the end of the year, you get an extra bill wanting $400 more dollars. If on a tight and balanced budget, this can hurt you badly. Budget Billing Savings As mention above, if your area is mostly stable and you pretty much have the same bill all year round. Or the range from month to month is very little. You could potentially be putting money towards your next bill each month or onto next years billing. If you are paying $175 a month, but for 9 months out of the year, you only used $125 a month. That is $50 dollars over 9 months, giving you an equity of $450. If the remaining 3 months usage are at the $175, you will have $450 sitting there to go towards next years bills. On the other hand, the last three months may be colder than normal temperatures. Making actual usage be $250 a month. That would be $75 over the intended $175 a month. But due to your other months being lower, you savings will cover this expense and still leave you some change to go onto the next year. Ask Before You Sign Up

Setting up a budget can be a bit challenging, but realize, anyone can do it. Learn how to set up a budget and start saving money, and start buying those things you've always wanted. Once you get your budget created it will all start to make sense on how you can start spending money on things you want instead of only buying what you need. When people think about a budget, they usually relate it to just paying bills on time, or just tracking an expense that you can adjust for savings. But did you know, the whole point of budgeting is to spend money on what you want. That might sound backwards but that is why you have a budget. So let's look into how to set up a budget. First we will go over the basics, then we will look at easier ways to creating a budget that won't seem so technical or overwhelming.

Know Your Income

In order to set up a budget, you have to know what your income is. It's all really easy addition and subtraction, but when you look at it as your livelihood, then it seems to be a little more complicated. If you have a normal consistent income, setting up a budget isn't that hard. Knowing how to set up a budget when you have a variable income can be difficult. Let's say your income is normal and steady, then this isn't bad at all. A normal income would even include more than one job or source of income. You would just add your monthly incomes, after taxes and or any deductions, and that would be the start of your budget. You also include your spouse, or significant other, or any other contributors that are living under one roof. Don't include anyone that is on a temporary stay. Variable Income Knowing how to set up a budget on a variable income will require averaging your income sources and setting goals. People that are in sales, or have their own businesses, don't always bring in the same monthly income. So in this situation, you have to set a goal that you can align a realistic monthly figure. Let's say you sale hot dogs on a corner of a busy street. You know if you sold 50 hotdogs through the whole day at $1.40 each, you would make $70 a day. You know that is a low projection of the amount you can really sell. There have been days you have sold close to 200 hotdogs, but there were rare days you only sold 40. It would be safe to say you are always going to bring home $70 a day, so you can use that as a constant in your budget. Any extra money can go towards months that weren't so good and towards your savings. After time, you will will have an average of what you make per month based on how many hotdogs you're selling. If you had more than one location, you would need to average all of them combined to give yourself a consistent income to set up your budget. Just remember, no matter the type of income you have, your goal should always be to save at least 10% to go into savings.

Listing Your Expenses

You will have two kinds of expenses, Fixed and Variable. Fixed expenses are your bills, or what you pay out, that don't change from month to month. This would be things like, mortgage, rent, insurances, and types of loans, or services. Variable expenses will be things like your automotive fuel, electric, water, food, or any type of bill that isn't a static amount every month. Fixed Expenses You will want to make a list of all your fixed expenses, for example: Mortgage/Rent, Cable, Car Insurance, Trash Pickup. Calculating these will be pretty easy since the amounts rarely change. It would be a good idea to include your savings as an expense as well. I know that sounds funny but in order to make a good budget, you should at least add 10% of you income as a payment towards yourself. Part of knowing how to set up a budget, is understanding that the goal is to get yourself into a position to buy things you want. So include in your fixed expenses, an amount you want to save each month. Usually you want it to be 10% of your income but that can vary based on your situation. The water and electric bill can be included under a fixed expense. However, that also depends how steady or how you have your services set up. Some utility companies have a balance pay plan, also known as a Budget-Billing Plan. This is where they average your bill over a year period and charge you the same amount each month. If you have a larger family, the utility bills will fluctuate enough that it may fall under a variable expense. Variable Expenses Variable expense are those that you have control over. Rent, car payments and such are fixed and the cost is determined by the supplier. Your variable expenses can be reduced by you. For example, if you like to take an hour long shower twice a day, you can reduce your water bill by cutting the shower time back. Any expense that is effected by you, is variable. It is in this area you can start managing your budget. Make a list of all your variable expenses, such as fuel for the car, groceries, eating out, apparel, or entertainment. Electric, gas and water can be included in variables, if your utility bills fluctuate. You will be able to see where you can start making cut backs to increase your savings. Read more on "Tips On How To Save Money". Your utilities could be a variable that you don't have much control over depending on the area you live in. If you live in an area where the temperatures have extreme variances, this will make setting up a budget a little harder. However, I would suggest taking a total of what you spend per year on your utilities and get an average based on 12 months. This will at least give you a fixed number to work with.

How To Set Up A Budget On A Sheet

It is really common for people to use a spreadsheet for budgeting or many other financial or mathematical calculations. However you can just as easily use pencil, paper and calculator. Spreadsheets just seem to give a certain visualization when it comes to setting up a budget. Below are screen-shots of a very basic budget, done in an Excel spreadsheet. You can also watch the video of me running through the same steps.   If you don't have Excel, you can use for FREE, Google Sheets. There is also budgeting you can use, that actually works much better than just using Excel. Setting Up Your Spreadsheet Open up a spreadsheet and make the following headings. Expense Name, Due Date, Total Balance and Monthly Payment. Your Due Date doesn't need to be a full date, just make it the day of the month. If a bill is due on the 4th of each month, then just enter "4th" in the field.

Next you will want to enter your expenses under the "Expense Name" column. To make it easier for you to track your expenses, you can color code them. You can see in this example below, that Fixed, Variable and Credit Cards have been highlighted in colors. This is not necessary but it does help.

You will now want to add a title field to the left and title it, "Total". In the same row and directly under the last entry in your "Monthly Payment" column, select the field as shown below. We are going to make this the sum of all the "Monthly Payments'.

There are several ways to create a sun in a field, this is just one of them. With your field selected, click on the Function icon to the left side of the formula bar. An "Insert Function" window will open. Select "SUM" and click on OK.

Highlight all the cells with a monthly payment in them and again click OK.

Now your "Total" field has a sum of all you monthly payments. This is what you are paying out each month.

In the row directly underneath "Total", create a Title called, "Monthly Income". In the Cell directly below the actual "Monthly Total", enter your exact monthly take-home income. This would be what you bring home after taxes, with-holdings and any benefits. Drop down a couple of rows and in the "Expense Name" column, create a title called "Net". In the same row, under your "Monthly Income" value, click on that cell. In the selected cell, type an "=" sign in the field. Then select the cell with your monthly income value.

Then type the "minus" symbol. Click on the cell above "Monthly Income", this would be the cell with your "Monthly Total" in it. Now press the enter key, you have just said, "Monthly Income", subtract "Monthly Payment Total".

In this example you can see that you have $954.67 left over each month based of these expenses. Now that your savings have been identified, you can now decide how much savings you would like to enter in the "Savings" payment. This is usually 10% of your income. In this scenario, this person's income is $32,000 a year, so 10% of that is $3200, divide by 12 months, makes it $267 a month.

Examples On How To Set Up A Budget Video

  Summary

As you can see in the above examples, you can start identifying expenses. For example, "Savings". If you noticed, I didn't include a value for savings in my budget set up. The reason is because at that point, I didn't know if I would have any money left over for savings. My goal for the savings expense value, was to at least have 10% of my take-home income. Now, I can see that I have more than my 10%, so now I can use that money to start paying off debts. Notice the credit card balances, now I know I can start increasing monthly payments to get these paid off and still keep my 10% towards savings. 50/30/20 System There is the 50/30/20 System you can use as a guide. This isn't the always the best method to use, but it does work for people that don't have the time or patients to track every expense detail or set up a budget. This system means, you spend 50% of your net income on bills, 30% on wants, and 20% on savings or paying off debt. The system allows you to focus more on the big picture, and really, if you do not have many monthly expenses, this can work quite well. However if you have a goo list of monthly expenses, I highly recommend keeping a more detailed budget. The drawback to this 50/30/20 method is, you may not make enough money that 50% of your earning will cover all your bills. Yo may live in an area that the cost of living is high, and again, it is going to take more than 50% of your total monthly income to pay your bills. You can however, adjust the 30% and the 20% on wants and savings to go toward bills. Although then it starts confusion and more than likely constant adjustments. Budgeting Tips Variable Income If you work in some form of sales, or a job that you live more off tips, this means your income is not fixed. You should consider your income as variable and this is where you will need to start making averages. A budget is very useful for this type situation. It identifies what your income has to be to pay bills and have savings. Averaging your income works best if you can get at least six months of numbers to work with. Average what you made, at least over the past six months, and then reduce the amount between 5% to 10%. By doing this, you are working on a minimum income and this will reduce risk of not being able to pay a bill in the future. Credit Cards Once your budget has been created, it will help you identify expenses that may need to be cleaned up. Credit Cards are the biggest among them all. Credit Card balances will be exposed and since they charge interest, these need to be reduced as soon as possible. As long as you pay the minimum amount, the balance will never go down, in fact, it will keep rising even if you are no longer charging on them. Savings Expense In the above example, you saw that there was way more than 10% of savings for each month. As I have mentioned, the savings expense should be at least 10% of you net income. If your situation is similar to the above example, you may be tempted to spend all of that monthly savings on paying off your credit cards, but don't. Still take out the 10% of your earnings as an expense and enter that in your Savings field for the following months. The savings expense is money put back so that you can buy what you want. But keep in mind, there are always emergency expenses. Things break and have to be fixed or replaced, so use this money for a cushion as well. I do recommend getting those credit card balances paid off as quick as you can, but never put yourself in a situation where you have no savings. All good things take time, be patient.

In Conclusion