Creating a personal budget is one of the most effective ways to meet your financial goals, stay out of debt, save for a home and avoid cramping your style because of poor cash flow. While many people just starting out create household budgets, they don’t always stick to them, in part because of a lack of monitoring and control. Using a few simple techniques, you can stay in control of your spending without having to live like church mice.
Create a Household Budget
Create a realistic budget using last year’s financial records to guide you. Your monthly bank and credit card statements are a good start. Keep copies of your income tax returns, Forms W-2 or Forms 1099, and investment summaries handy. Break your expenses into those that are necessary, such as rent, loan payments and utilities, and discretionary expenses, such as dining out, movies and gym memberships. Enter your anticipated expenses for each month using last year’s records. Enter your expected monthly income and subtract your expenses each month to see if you can pay your bills. If not, start trimming your discretionary expenses. If you have money left over, divide that money into savings categories such as retirement account, home down payment, emergency fund, vacation or debt reduction.
Create a Cash Flow Report
Once you’ve created your annual budget, determine the timing of your payments and income. For example, you might put an insurance payment in your January column, but if you put that on a credit card, you won’t use cash to pay that expense in January. You might earn $3,000 from contract work in February, but the client might not have to pay you until March. Make a copy of your budget document and put the actual monthly amounts you’ll pay and exact income that will hit your bank account each month into your monthly columns. This will help you control your spending based on your cash needs.
Use a variety of formulas that will alert you to your projected annual progress as you enter expenses and income. At the end of your monthly columns, create an “Average” column that shows your average monthly spending, and a “Projected Annual” column that lets you see what you will spend on specific categories if you keep spending at your current level. You’re more likely to control your spending if you see that dinner and a movie twice a month will end up costing roughly $1,500 when you factor in credit card interest. Use percentage formulas to control your spending and savings. For example, limit your monthly college fund or vacation contribution to a percentage of your monthly net income, rather than saving a set amount each month.
Create Net Worth Formulas
Just because you’re reducing credit card debt doesn’t mean your financial situation is improving. Create an area of your budget that updates all of your assets and debt each month and compares your current net worth to last year’s. You might find that while you’ve paid off $5,000 in credit card debt your spending has reduced your savings by $7,000, leaving you $2,000 further in debt.
Update Your Budget
Your budget is only as good as the information that goes into it. Entering your expenses -- even small ones -- lets you see if you’re hitting your goals. For example, enter every dime you spend on dining out each week, even if it’s a $4 cup of morning coffee, $7 lunch or $12 dinner you put on your plastic. If the two of you don’t record those three expenses just one day each week, you won’t realize you’re spending more than $2,500 each year doing that.
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