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Budgeting 101

Budget is not an exciting word. It’s actually sort of a party-pooper, wet-blanket, sort of word. It can mean giving up things that make life easy and fun, especially when it comes to instant gratification purchases. On the other hand a well designed budget can help you reach bigger financial goals and financial independence, and that’s pretty darn gratifying, too.

It’s all about what motivates you. Your motivation may be to not have to beg mom and dad for money. It may be to pay your way through school. It may be to have the freedom to take at least one big trip a year. Whatever your ultimate goal, it doesn’t have to take rocket science to get there. And it doesn’t necessarily mean giving up all the little stuff along the way either. It’s about finding a balance.

Basically budgeting means analyzing what you have coming in, then developing a reasonable and goal-oriented plan for what goes out. A budget is a great tool that will help you make the most of your money; it will help you redirect your cash to where you really want it to go.

There are several steps to budget efficiently and correctly. The following are key things to consider when sitting down to work out your new budget.

Set Goals:

  • Goals are an important aspect of budgeting because they give you something to work towards and help you stick to your plan. Your goals should be specific (taking a Mexico spring break vacation) and take into account your timeline and cost.
  • The next step is to make sure your goals are measurable. You should break the price down into amounts that you can regularly deposit so you can monitor growth and track progress.
  • Last, make sure your goals are reasonable and realistic. If your goals are too modest then you might lack the desire to keep going, too large and you might get frustrated. To help layout your financial goals use this handy chart.

Establish an Emergency Account:

An important aspect of being sound financially is being ready for the unexpected. A great way to do this is to have money in a savings account that is easily accessible whenever you might need it.

  • A good rule of thumb is having three to six times the amount of your essential monthly living expenses readily available. If you have an emergency account it will prevent you from having to turn to credit cards or your parents in times of financial crisis.

Track Your Cash:

The last thing to do before you set your budget is to find out where your money is going. Most of the time that cash disappears and you can’t even remember what you spent it on. Here are some key things to do to find out where your moola is going:
  1. Write it down- Record every purchase you make and then add up your daily spending. Try this chart to help.
  2. Keep receipts- This will help you track exactly what you are spending
  3. Use checks or debit cards- This helps you keep better track of spending instead of cash
  4. Monitor ATM use- This will let you know how often you are going and how quickly you are spending cash
  5. Use expense tracking software- After you have tracked using the methods above try laying it all out in your personal categories to keep better track of your money

Construct the Budget:

Now that you have a goal and a good idea of where your money has been going it’s time to layout your budget. Budgeting is nothing more than a spending and savings plan. Your personal budget should include your income, expenses and action items.

Begin with income because it will determine what you can afford to spend and save each month. Don’t forget the primary rule of budgeting: expenses should always fit within earnings. Use this handy Monthly Income Chart to help you along.

The next section is your expenses. This area should include two columns- one for what you have been spending your money on (using your tracking info) and the other for proposed spending. Make sure you include everything you have been spending money on. For bills that fluctuate determine the average for the year. Also make sure to include all your discretionary expenses (those things you don’t really need but make life fun).

Now the big moment, total your current expenses and subtract from your income to find out how you are doing. Don’t panic if you are spending more than you make, that’s why you are budgeting. Budgeting is not necessarily about getting rid of expenses but about how you can rearrange them. Add a new column to your monthly spending chart to rearrange your current expenses into proposed expenses and outline your new budget.

Finally, take action on your new budget. Stick to your plan and you will be able to achieve the financial goals you have set out for yourself.

Tips to Stay on Track:

To stay on track with your new budget, pay attention to some of these tips.
  1. Debt- Stay away from spending beyond your means using credit cards. Make sure you use them responsibly and stay away from keeping a revolving balance.
  2. Spending- Take a moment to assess your purchases before you fork over the cash. Do I need it? Do I need it now? What would happen if I didn’t have it?
  3. Create a category in your new budget for impulse purchases. This is the easiest way to get off track and most people can’t avoid it so plan for it.
  4. It’s going to be hard at first and you will probably need to reconfigure your budget a couple times before it’s perfect. Not a problem, just keep practicing.

Try to remember that reaching your financial goals doesn’t happen overnight. Just like exercising, the results build upon themselves day-by-day. Keep working at it and it will eventually become second nature. Who knows, soon you could be talking about your budget at parties. Your friends will be jealous, and budgeting will be all the rage. Most likely that won’t happen. Budgeting will still sound boring. But hey, you’ll still be meeting your financial goals. And ultimately, financial freedom never goes out of style.

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