Wednesday, June 13, 2007

How To Create A Budget That Works

Creating a working budget can help you achieve your financial goals. Whether you are in good financial shape or are struggling, having a budget puts you in control of your money.

The first step is to figure out how much your lifestyle is costing you. No need to get complicated here. Just grab a pad of paper and pen and make a list of all of your monthly expenses. List the usual expenses like housing (rent or mortgage), electric, oil, car payment, car insurance, life insurance, telephone, cell phones, cable, internet, home equity loans, and credit cards. But don’t forget all those other expenses like groceries, cell phones, hair cuts, lawn care, gifts, and kid’s activities (like dance, soccer, camps, etc.). Add them all together to come up with your total monthly expenses.

Next list your monthly net income (your take home pay). Don’t forget to include any sporadic income like medical reimbursements, alimony, child support, investment income, etc. Add all streams of income together to get your total net monthly income.

Now comes the important step. Subtract your total monthly expenses from your total monthly income. Hopefully you’ll have some money leftover. If you come up short, don’t despair. That means you need to either lower your expenses or increase your income, or both. Start with a review of your expenses. Are there expenses you could decrease, like your grocery bill? Are there expenses you could eliminate, like your cell phone or cable? Keep cutting until you can at least lower your expenses to match your income. If no matter how much you slash your expenses you can not get them down to your income, you’ll have to take drastic measures. Perhaps it’s time to downgrade in house and/or car. Perhaps you need to consider the dreaded part time job. Or, it’s time to consider looking for a higher paying job. Whatever you decide, getting your expenses lower than your income, or your income higher than your expenses, is a must.

When your expenses are less than your income, you must decide what you are going to do with the surplus funds. If you don’t decide what you will do with these funds in advance, they will somehow magically disappear. That’s the funny thing about money, if you don’t tell it what to do, somehow it finds a way to leave. The first thing to consider with excess funds is debt. If you have any debts you ought to make a plan to pay them off. One of the keys to financial success is earning interest, not paying interest. So make a decision not to borrow any more money for any reason. Then, set aside $1,000 as a baby emergency fund. This small stash will make it possible for you to resist borrowing money (i.e. credit cards) for unexpected expenses while you are paying down your debts. After you have the $1,000 set aside, it is time to get serious about paying off your debts. Make a list of all of your debts. Put them in order from smallest to largest, and make minimum payments on all the debts except the smallest one. This is often referred to as a “debt snowball”. Concentrate on paying as much as you can toward that smallest debt until it is gone. Once that one has been paid off, focus on the next smallest debt on your list. Continue this way until all of your debts are paid off.

Once you have a working budget in place and have paid off all of your debts, you will truly be in control of your finances. And once that happens, the sky’s the limit!