Follow these steps to put a
solid budget plan into action.
Every great financial plan starts with a sound
budget. If you’re trying to pay off bills or
save for a dream vacation, a budget is your
first step toward making your financial goals
a reality. Follow these steps for setting up a
realistic budget that gets you where you want
to go.
1. Calculate expenses
Your first order of business is finding out
exactly how much you’re spending each
month. Do this by consulting your bank
statements, receipts and financial files.
Because some expenses are intermittent,
such as insurance payments, you’ll get the
most accurate financial picture if you
calculate an average for six months to a
year. Add up everything you spent for the
last six to 12 months and then divide by the
amount of months, which will give you your
average monthly expenses.
Remember that being thorough when you add
up expenses is important in creating a
realistic budget. A forgotten bill really throws
a wrench into your savings plan. When
calculating your expenses, also factor in
unexpected bills, such as unplanned car
repairs. A good rule of thumb is to add an
extra 10 percent to 15 percent. So
if you’ve determined that you spend $1,500 a
month, add $150 to $225.
2. Determine your income
Once you’ve figured out how much money
you need to stay afloat financially each
month, it’s time to determine your actual
income. Besides your regular salary, get an
accurate picture by adding in any extra funds
that come your way throughout the year,
such as cash gifts, sale of items online or
via garage sales, and don’t forget other
income sources like alimony, child support,
interest, dividends and rental income.
3. Set savings and debt payoff goals
In order to determine realistic savings and
debt payoff goals, you must find out if you
have a budget shortfall or overage. Do this
by subtracting your monthly expenses from
your income. If you determine you’re making
more money than you’re spending,
congratulations. This amount can be
earmarked for savings and to pay off debt.
But if you determine you’re spending more
than you’re making, it’s time to do some
cutting so you have something to save and
don’t go further into debt. The best way to
figure out where you can cut from your
expenses is to track your spending and
record every expense for a month. Seemingly
insignificant items such as a cup of coffee
add up over time. For instance, even if you
spend just $5 a week on snacks, that adds
up to $260 a year, which is not insignificant.
One you have a clear picture of where all of
your money goes, be merciless in cutting
expenses until your budget is in the black.
Cut enough so that you have 10 percent to
20 percent of your income left over each
month to add to your savings account. If you
are unable to cut a sufficient amount from
your budget, consider ways you can increase
your income.
4. Record spending and track
progress
The best way to stay on top of your budget
is to record all of your expenses and income .
Having to input expenses will cause you to
think twice before splurging, and it’s
especially satisfying and motivating to record
when you’ve met a savings goal.
5. Be realistic
Aim for sticking to your budget most of the
time, and you’re bound to reach your
financial goals. Breaking your budget
occasionally is OK, providing you get right
back on track as soon as possible.
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