Budgets can be formal, with precise details showing how your money comes in and is spent and/or saved. You can also go with a less formal budget, one that tracks your finances, but gives you some leeway on how your money is spent. With either approach you have to keep your expenses below your income to succeed.
Before you put a budget plan in place, you’ll need to examine four areas. The more detailed you are, the better job you’ll do in managing your finances.
1. Income and Outgo — This is where most people have trouble with a budget. Their outgo (expenses) is greater than their income. It seems that it should be an easy thing to track, right? It should be if your income is constant. These days, however, many people have incomes that fluctuate, and are based on commission sales or freelance work. In this case you need to come up with an average income of a year and figure out your expenses accordingly. For people with a steady income, a paycheck is usually the prime source of funds. Also consider stock dividends, a pension and any other source of income.
2. Managing Expenses — The biggest budget buster for most people is what they spend. Quite simply, when you spend more than you bring in you’ll either turn to credit to fill in the gap or you’ll tap your savings. A one month jump in expenses may not hurt you, but a long-term habit of spending more than what you bring can lead to financial disaster. Look for ways to reduce your expenses including consolidating your insurance, switching from a supermarket to a warehouse club or combining your Internet, cable and phone service to one provider (many people save money with T-Mobile prepaid plans that offer an easy to manage budgetary option). Learn how to manage your electric bill, finding ways to drive down one of your biggest expenses in the summer and winter.
3. Managing Credit — Credit problems will hurt you and can destroy your budget. Credit can be a good thing, but it is often mismanaged, too expensive or both. If your credit is good you have much more leverage than the consumer who has bad or sub-prime credit. Transfer your credit card balances from high-interest credit cards to low-interest cards. Use the additional funds to pay down your debt faster with Dave Ramsey’s snowball plan. You can also contact your current card issuers and ask for a lower rate — if you’re successful, then you’ll avoid transfer rates.
4. Establishing Financial Goals — Once you have a handle on your expenses you’ll be in a position to plan for the future. This includes setting aside money for emergencies and for specific short-term goals such as vacations and holidays. You may need to work with a financial advisor to determine how much money you’ll need for retirement. You can also use a retirement calculator to determine how much you’ll need. Chances are your retirement fund took a beating over the past few years. Seek to replenish it now so you’re not scraping by later on.
Now that you’ve gone through the preliminary steps for budget planning, you’ll want to download some budget worksheets to start planning. Look for software too, providing you with a handy way to track and save money.
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