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| Keeping a Budgeting |
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Creating a budget isn't difficult. All you need to do is spend some time organizing and planning.
Once it's set up, a budget is easy to maintain. Just follow the steps below with your budgeting planning.
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- Step 1: Set your goals
The first thing you need to do is identify your goals- a new home, early retirement, even an education.
You can group your goals into three areas: short-term, mid-term, and long-term financial goals. Ask yourself:
What's important to me? What do I need? What do I want? Your answers to these questions will help you
define your goals. If you're married, you and your spouse should discuss your answers and decide what
your shared goals will be. Then put those goals in writing. Once you know what you want, you can
begin to budget accordingly.
- Short-term goals: These are goals that you'll achieve in the next years or so.
They may include paying off a $1,000 credit card debt, purchasing a new television or refrigerator,
or paying for a vacation.
- Mid-term goals:: These are goals that you want to achieve in the next two to five years.
For example, you may want to save for a down payment on a house or new furniture for your home.
- Long-term goals: These are goals that make more than five years to reach. Retirement savings
and college expenses are common examples.
- Step 2: Gather information
Pull together the records of all of your household income and expenses. Be thorough and honest when estimating
and expenses. Your budget should be an accurate picture, not a "best case scenario." Gather the following information:
- Paycheck stubs
- Last year's Federal income tax return
- Checkbook registers
- Credit card statements (especially year-end summaries)
- Payment information for major purchases such as car loans and credit lines
- Financial statements from banks and investment firms
- Step 3: Find out where you stand
After you've collected all of the information, you'll use it to figure out what your spending habits are right now.
This will help you see the relationship between your income and expenses. Don't worry if you use estimates
for your first budget calculation. It may take a few months to find out exactly where you stand, but the first time
should give you a good idea of what you're spending, and where you're spending it.You should organize your
information into three sections below. These three sections will be used to make up your budget.
- What you earn:Add your income from various sources, including "take home pay" after taxes,
commissions or bonuses, alimony, child support, Social Security, or retirement benefits, disability, interest, dividends, etc.
- What you spend:Add your fixed and variable expenses. Fixed expenses are those that don't change
every month (rent, mortgage, insurance, loan payments, retirement savings, etc.) and usually cannot be eliminated.
Variable expenses are those that change (cable television, groceries, gas for your car, telephone, etc.) and
could be reduced or eliminated.
- The bottom line: Subtract total expenses from total income. The amount left over is called
"discretionary income." This is the money you can use for emergencies and meeting budget goals.
- Step 4: Check your bottom line
Your bottom line is the difference between what you earn and what you spend. It's a clear way to know if you're
spending too much. If the figure is positive, consider increasing the amount you pay toward debt or adding more to
your savings. If the figure is negative, you are spending more than 15-20% of take-home pay on repaying debts and
credit cards, you could be in a danger zone. If your bottom line is negative, you need to examine each variable expense
and decide how to bring your spending under control.
- Step 5: Keep track of expenses
After you do your first budget calculation, start keeping a monthly expense record. Even if your bottom line is positive, it's still
important to learn everything you can about how you spend your money.
Carry a small notebook everywhere and record all purchases and withdrawals. You'll be amazed at
what you learn about your spending habits. For example, many people find that they spend hundreds or even thousands
of dollars each year on coffee, snacks, magazines, and soda. People don't typically overspend in areas like dental care
or groceries. They get into trouble with non-essentials the things they could easily do without. The goal of tracking expenses
is to understand where you're spending your money.
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