Setting up your monthly budget can be an exercise in futility unless you get in the appropriate mindset. Rather than considering budgeting a punitive measure, you need to create a financial plan that suits your lifestyle, while also curbing superfluous spending that foils your savings goals. As an added benefit, a household budget helps you understand your finances and can instill lifelong habits in saving and spending responsibly.
Face financial facts. If you run out of money every month, rack up high-interest debt or cannot pay off existing debt, you need to get a grip on your spending. Track your spending habits by going on a cash-only diet, and writing down all purchases in a notebook.
Categorize your spending to determine where you devote the most cash. Many people encounter surprisingly high expenditures in the category of food, especially when including those daily coffee drinks. Other cash-consuming suspects include entertainment, magazines, clothing and gifts.
Total your monthly expenses and income. On a printed worksheet or an online budget worksheet, such as those available on Mint.com, fill in a column that account for all income, including monthly pay, interest, consistent bonuses and gifts. Do the same exercise in another column for your expenses, referring to bills, bank statements and your notebook of cash expenditures to account for everything.
Examine your irregular or annual expenses, such as vacations, income taxes, property taxes, insurance premiums, car repairs and home maintenance. Establish a monthly amount that covers these expenses.
Allot a dedicated amount toward paying off debt, establishing an emergency fund and saving toward short-term and long-term goals. If you have high-interest debt, dedicate all of this amount toward paying off the balance before saving toward other goals.
Review your cash expenditures. At this point, you should have a firmer idea of how much you can afford to spend spontaneously on daily luxuries such as lattes and monthly luxuries such as new clothing or shoes. Classify this category as your adult allowance to spend without guilt every month.
Items you will need
- Paycheck stubs
- Bank statements
- Budget worksheet
- Consult your budget every few months to ensure you have stayed faithful to the various categories and financial goals.
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