Budgeting

How to Create and Manage a Budget

Regardless of economic standing or which generation you fall into, every consumer can benefit from creating and managing a budget. A budget gives people a sense of control over their money, which is very empowering. Think of a budget as a financial foundation. Each person’s foundation is going to be different, just as each financial situation is different.

While the concept of a budget often conjures up sacrifice and cutting out fun, it’s nothing to be afraid of.A budget simply shows how much money you have coming in and how those funds are spent. It’s also one of the most important tools in building a successful financial future, because it helps you get the most out of your money.

Creating a Budget

Budgeting strategies and techniques vary across the board. There will be differences, for example, between a budget for a first-year college student and one for a retiree. But there are five basic steps in creating a budget. They are all important because they build on one another, helping you organize your finances in a sensible way.

Step 1: Determine Your Financial Goals

There are two types of financial goals: immediate and long range. Immediate goals refer to how you want to use your money today, while long-range goals deal with how you want to spend your money in the future. Both types are important and should be carefully considered. Weigh each goal against the next to determine which one takes precedence.

You need to determine which goals address necessities and which ones cover luxuries. Then, you can prioritize your financial goals accordingly.

Immediate financial goals would include paying your mortgage or rent, car payment, utilities, child care, food, cell phone and household supplies. Secondary goals would address clothing, newspaper or magazine subscriptions, and an evening out with family or friends. Getting out of debt might be another secondary goal. Luxury goals could include a massage, a family vacation or international travel. Long-range financial goals could also include retirement savings, investments and charitable donations.

Step 2: Calculate Your Income and Expenses

After you determine your financial goals, you can implement a plan for reaching them. To do this, you need to determine your income and your expenses. Most people budget on a monthly basis because most bills follow a monthly schedule.

Start by making a list of your monthly income sources, including your salary (after taxes), any bonuses you incur on a regular basis, and child support or alimony payments. If you don’t know the exact amount, you can use an estimate. Once you have your numbers, add them up. The total is your monthly income.

The next part of the equation is your expenses, which fall into three categories: fixed committed expenses, variable committed expenses and discretionary expenses.

• Fixed committed expenses: These have a fixed monthly amount, such as your mortgage or rent.
• Variable committed expense: These vary from one month to the next month based on need, and would include groceries and gasoline.
• Discretionary expenses: These are optional expenses and include recreation and entertainment. A gym membership would also fall into this category, unless you have signed a contract — which would put it in the category of fixed expenses.

Step 3: Analyze Your Spending and Balance Your Checking Account

The ultimate goal in budgeting is to make sure your expenses do not exceed your monthly income. If this is the case, and more money is going out than coming in, then spending habits need to be examined and modified. This doesn’t necessarily mean you need to start penny-pinching; it just means it is time to revisit the discretionary cost category and see where you are willing and able to cut the fat.

If you make any payments by check, your checkbook register or online statement can help you keep track of incoming and outgoing money, and what you spend money on. Although paying by check is becoming rarer, those who stick to one of these payment tracking method should keep their checking accounts balanced. This will help you avoid overdraft fees or bounced checks, and it can shed some light on your spending habits.

Keeping Your Checking Account Balanced

• Keep records for all your deposits and purchases. Record each one in your check register, which the bank will provide you.
• Print out your monthly bank statement if you aren’t already getting one in the mail. If you’re doing everything online, there is software that can make this step — and budgeting — really easy.
• Do your own math for deposits and withdrawals to make sure your bank hasn’t missed anything or taken any liberties with your money. Reconcile line by line, making sure your record of checks is the same as the statement.
• Find the ending number from each monthly statement and work backward, check to see to see what has cleared, and what has not cleared. Deposits that haven’t cleared will need to be subtracted from your balance. If your checks haven’t cleared, they will have to be added back to your balance until they do.
• Go line by line and account for any fees you’re charged. Seeing them up close may prompt you to call and ask to have some removed, which the banks often will do if you persist. Also, add the pennies of interest you may have received.

Step 4: Revisit Your Original Budget

After you’ve had a chance to monitor your income and expenses for a month or two, you will be more aware of areas that need adjusting. Maybe your initial monthly income estimates were off, or perhaps you didn’t account for expenses like car repairs or veterinarian bills. Now you can make the necessary and informed adjustments to have a budget that is more comprehensive and well-rounded.

Once you work out all the kinks in your budget, you should be able to stick to it for a length of time. However, it’s not meant to be set in stone. You must manage your budget regularly by accounting for changes in your income and spending needs. It’s recommended you do this every three months.

If you get a promotion, for example, you can increase your discretionary spending as well as your savings goals. On the other hand, a layoff or shorter work hours could mean cutting back on spending until you find a way to supplement your income.

You can also use regular budget evaluations to prepare for your plans in the near future. Some individuals may feel more comfortable cutting back discretionary spending for the month leading up to a family vacation or the holiday season.

Step 5: Commitment

Creating a budget is a great step in working toward a more financially sound future for you and your family. Making a commitment to stick to the budget you created is what will get you there. The best way to stay committed to your budget is to keep a realistic outlook, evaluate it often and don’t be afraid to make adjustments. A budget is all about balance.

Managing Your Budget When Unexpected Bills Arrive

Once you have a workable budget in place, setting aside $50 per week could add up quickly in an emergency fund. In a year you would have $2,600 set aside, plus any interest, for when the refrigerator stops working or when the transmission blows.

Experts recommend looking at your withholding taxes to find hidden cash. If you receive a large refund every year, perhaps you need to change your filing status to receive additional money in your paycheck to put toward an emergency fund. Unless, that is, you are putting your tax return funds into that fund.

Medical crises in particular can turn a balanced budget upside down. Negotiate large medical expenses, such as an emergency hospital stay, with the hospital. (Almost all hospitals negotiate fees.) Often if you contact them immediately instead of waiting until the amount goes into collections, the hospital or provider’s office can set up a payment plan.

If not, a medical bill consolidation may help, as it allows you to combine all your medical bills into one lower monthly bill through an agency or a bank loan. This not only makes it easier on you, but the arrangement protects your credit score because you are able to make on-time payments. The downside is it may take you longer to pay your debt in full.

The Benefits of Budgeting

Everyone can benefit from taking a pronounced and proactive approach to control their finances. Committing to your budget will help guide you into a much better financial position. Budgeting can improve your life because it:

• Reveals waste. Creating a budget sheds light on areas that many people neglect to notice on a day-to-day basis.
• Directs priorities. A budget allows for people to look at the big picture of their spending habits and set new priorities to maximize their money’s potential.
• Creates new habits. When people get a clearer picture of how they’ve been using their money, it allows them to shift expenditures into different categories, making them more conscious of unnecessary spending.
• Reduces stress. Finances are one of the top stress-inducing situations. When there is a sense of control over the money coming in and the money going out, the stress can transform into a feeling of empowerment.
• Educates. Having a budget allows people to view money as a tool, shifting the mindset to focus on long-term goals and future needs.

Creating a budget is the first step, but maintaining the budget is where you start to see real growth in yourself and more stretch in your dollar. Sticking to a budget can be a difficult task for people who aren’t used to spending boundaries or self-discipline in their finances, so it’s important to maintain a positive attitude toward the process.

Staying motivated can help alleviate some of the pressures of budgeting. Consider setting aside some money each month so you can look forward to a relaxing vacation at the end of the year.

Finally, set realistic goals. Start slowly, building up to a plan that works for you and your lifestyle.

When you Need Better Control of Your Money Budget Busting Tips

• Be smart about dining out. Research that, on average, an in-home meal costs about a third of what it costs to buy the same food at a restaurant. This is one place many people could make changes, experts say. If you usually go out to lunch, try cutting back to a couple of times a week, which will make it more of a treat while saving you money. Watch for restaurants that offer early bird specials or two-for-one deals.
• Power pay your credit cards. "If you are carrying a credit card balance from month to month, then you need to develop a strategy to power pay that debt. The faster you get it out of the way, the sooner you can save for the future." Credit cards are charging an average interest rate of 15 percent, and some people with poor credit ratings pay an average of 26 percent or higher.
• Pay with cash. It’s easier to overspend when you’re using a credit card than when you’re doling out cash. One budgeting expert uses cash for groceries, so she’s more careful about her purchases and less likely to buy food that wilts or goes bad before she uses it. When you have to pitch spoiled food, "you can almost see your money being thrown out in the trash". Be smart about loans. Pay for big purchases, such as cars, with the shortest payment plan possible. Beware of taking a car loan that is longer than the time that you plan to own the car.
• Trim unnecessary expenses. Look for places where you’re spending money on things you don’t really need or use. For instance, if you get hundreds of channels on cable but only watch a few, change your plan and cut your bill. If you buy coffee out every day, consider brewing it at home. Those types of expenses really add up over time.
• Beware of shopping pitfalls. Many people buy things too quickly as they wander through stores. Try to avoid that. Instead, go home and think about whether you really need the item or could get by without it. Evaluate your routine. If you’re driving 10 miles to go to the grocery store every day, try shopping once a week instead. Plan meals, then make a grocery list and stick to it. You’ll spend less on gas, and you’ll be less likely to buy things you don’t need.
• Set realistic vacation expectations. Take a close look at what you can afford. That may mean doing a staycation one year and splurging on a trip the next year.
• Plan for impulse buys. Designate some cash in your budget for impulse purchases, so you can enjoy some mad money and still live within your means.
• Make sure you are not overpaying Uncle Sam. If you get a big tax refund every year, adjust your withholding so that you get the money instead of the government and put that money directly into savings so you’re not tempted to spend it.
• This might seem corny, but it works. Royal.....