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Developing a basic budget doesn’t have to be difficult

A budget is a personal financial planning tool that allows you to develop a solid plan for how you will spend your money each month and how to keep track of your long-term spending habits.

The problem with a budget is that it is all too often misunderstood. Firstly, it is often viewed as a negative, rather than a tool for positive spending reinforcement. Secondly, the reason why most people view budgets mostly negative is because they believe it will be difficult to create one or they have no idea how to create it.

The first step to understanding a budget is knowing how to do it.

It certainly isn’t exciting or glamorous; however, this is a vital part to balancing your household and securing your future.

We’ll spare you the lecture; you already know why a budget is important. Let’s dive step-by-step into how to create a budget.

How To Create a Basic Budget

Before we get too far ahead of ourselves, there are two few things you should keep in mind:

  • It is important to be a detailed and accurate with your finances as possible. This means working with what you currently have and any receipts that help you get an accurate picture of what you spend
  • If you find yourself overwhelmed you should talk to a professional financial adviser.

Here is a step-by-step guide on how to create a budget:

  1. Record all money you have coming in. This includes your salary (once taxes are taken out) and any outside sources of income you may get.
  2. Round up all of your financial statements, including utility bills, investment accounts, retirement account statements, bank statements and records of income sources.
  3. Create a monthly average. It sometimes helps to come up with a an estimate before you gather all of your financial statement,s so that you can compare an contrast the benefits of a budget.
  4. Record all monthly expenses. Begin with your rent/mortgage and all of your expected expenses such as car payments, auto/home/life insurance, groceries, utilities, student loans, credit card payments and retirement savings. This should also include what you’ve spent on entertainment (which includes dinners out, movies and drinks).
  5. Now split your expenses into two categories: variable and fixed. Your fixed expenses are the expenses that stay the same – or about the same – every month. These would be your loans, car payments rent/mortgage and your utilities. They may change slightly (i.e.; utilities) but these need to consider your necessary expenses. Your variable expenses are those that change month-to-month, such as groceries, gasoline and entertainment.
  6. Total your monthly expenses and your monthly income. This is where it gets difficult:
  7. If you have more income than expenses (if your budget comes out positive): you can choose where you’d like to stash your extra cash. We recommend retirement accounts as well as rainy day savings funds.
  8. If you have more money coming out than in, you will need to begin making cuts. If you’re wondering where to cut and how much, the answer is simple: cut all unnecessary – or variable – expenses and keep cutting until your budget shows more income than expenses. You may also need to cut AND simultaneously find alternative sources of income to meet your expenses.
  9. Create a goal: Now that you have balanced your budget, you should create a savings goal. A savings goal is important even if you are on track with your budget because a savings goal  helps keep you on track. Whether that goal is planning for a vacation or adding more to your retirement fund, you should set a realistic goal and a timeframe within which you’d like to achieve it.
  10. Review your budget every month. Life’s little expenses can sometimes get in the way and throw our budgets off track, so it is important to review your budget every month and check in to ensure you are staying on track. Ideally, you will do this after the first of the month for the previous month and use that as your projection to adjust your current budget.

A Basic Budget Doesn’t Have To Be A Burden

Now that you have the ten basic steps to creating a solid budget, you have some wiggle room. If you had more income left over, you can play with your numbers. This would help project your future savings based on these numbers.

If you find yourself in financial trouble after creating a budget, there is help for you. A good financial adviser can help you figure out how to set aside funds.