Are you one of the 60 percent of American’s who do not have a personal budget? Perhaps you think it isn’t worth the time and effort when you know exactly what you are doing with your money each month? Perhaps you think it can’t help you save anything? You might believe that it will be too depressing to see how little you earn and how much you spend, or you might just think that you do not have the time to sit down and create one.
Whatever you think, creating a personal budget is a worthwhile activity. It’s a proven way to help you build wealth, and it can also help you get out of debt and cut expenses. Basically, there is no way that a budget cannot help with improving your financial position. If you are a first-time budgeter and not sure where to start, then look no further. Here are nine steps for creating a personal budget.
Know how much money you have
The money you have is money that belongs to you. You’ll find it in savings accounts, checking accounts and investment accounts. Chances are you probably never think about this money as it’s rare that we ever see it, but it all contributes to your net worth so total it up.
Work out your debt
Next, you need to work out your monthly debt payments. These come in the form of how much you have to pay off each month for mortgages, credit card debts and any high-interest, need a loan bad credit borrowing you’ve taken out in the past. Consider how much you owe on each debt account as well as their minimum monthly payment, and that will give you how much debt you are in. It will also help determine your net worth.
Determine your net worth
With the collected figures, you can now determine your net worth. Simply subtract what you owe from what you have, and that is your worth. Don’t worry if it is negative!
Work out how much money you make
Next, you need to work out how much money you make. The money you make will focus by and large around your salary. This is easy to work out for those who are on a fixed salary, but less so for the 59 percent of the American workforce who are paid hourly and whose income, therefore, is unpredictable. The best way to try and gauge how much money you make in that scenario is to work out your average monthly week package over the last year. Alternatively, you could just use your lowest take-home figure of the past 12 months which would give you’re an ultra-conservative estimate.
Determine your expenses
Who keeps receipts in this day and age? You should if you want to work out your monthly expenses. For one calendar month, keep receipts for everything you spend money on, be it that sandwich you bought for lunch, gas for the car or new clothes. You’ll need utility bills as well. You can then divide these expenses up into categories, such as household bills, leisure spending, automotive bills and food and drink. The categories will become important later.
Calculate your bottom line
You now have your average monthly income and your average monthly expenditure which means you can work out the most important figure of the whole process – the bottom line. The bottom line will tell you if you are underspending or overspending. Subtract your expenditure from your income, and if you have a positive figure, then you are living within your means. If you have a negative figure, then it’s time to start looking at how you can reduce your expenditure to get yourself back in the black.
Find ways to reduce your expenditure
The bottom line tells you your financial position, and it can also offer a number of pointers as to how to improve it. When you determined your monthly expenses, you divided them up into categories. Take a look at those and see what you could possibly cut back on. You could be spending $400 a month on leisure spending, which would instantly stand out as an area to look at. Knocking a few of those trips to the movies or to watch an NFL game on the head will instantly bring that down and push you closer to living within your means. Is there a way you can reduce your grocery bill, such as by moving away from brand products? If your cell phone bill is much higher than you ever realized, could you move networks? By knowing where your expenditure is going, you can easily see areas for improvement.
Can you start saving?
The aim of all this is to get your bottom line to be positive. Then you can then either start paying off debts quicker or put money aside into a savings account – both of which will improve your net worth. If you’re in the financial position to be able to add savings as a monthly expense and pay yourself a set amount each month, you’ll soon be building up a nice little nest egg. That can then come in handy should any nasty surprises, like an expensive repair to your car or a leaking roof, be lurking around the corner. Or it can go towards really treating yourself with a vacation or another leisure activity you’ve earned through your financial management.
Keep monitoring and stay disciplined
Once your budget is set up, it will take no more than one hour a week to keep track of it. If you stay disciplined in your planning and making sure the bottom line remains positive, before long, you’ll be reaping the financial rewards. Gone will be that life of living from paycheck to paycheck and in its place will be financial security and investing in both yours and your family’s future.
There’s no better time to start your first personal budget – what are you waiting for?