Step by Step Guide To Create A Realistic Budget: Part-2
Last week we talked about budgeting basics. For people who create a budget, it may not be the most exciting stuff in the world, but it helps them maintain their financial house in order. Just keep in mind while preparing your budget that you need to provide as much detailed information as possible.
Here is your step by step guide to create a realistic budget:
The Most Important Tip – Don’t Put It Off Any Longer
Most People often procrastinate, or avoid making a budget altogether. And even fewer people manage to stick to it. When you actually think of sitting down with your stack of bills and a pen, or with a spreadsheet document on your computer, you immediately find something more important to do. Creating a budget seems like a boring task to you.
The truth is, you fear confronting your financial life in the harsh and bitter light of day. Despite all your delaying tactics and excuses, it must be done. Remember, if you don’t control your money NOW, it will control you. By procrastinating any longer, you are prohibiting yourself from enjoying the sense of freedom that comes only from controlling your finances. So, now be brave, sit down and just do it.
Step 1: Pull Out All Your Financial Statements
Yes, it includes all the recent utility bills, investment accounts, bank statements or any other bill that has some information about your income or expense. This will be used for calculating a monthly average, so try to include as much information as possible.
Step 2: Sum Up The Exact Figures of Your Income
If you receive a regular paycheck, consider take home pay that you receive after automatic tax deduction. If you are self-employed or have any other sources of income such as investments, record these as well.
Step 3: Create A List of Monthly Expenses
Jot down all the expenses you incur over the course of a month. It includes everything from your grocery bills to restaurant receipts, mortgage payments, auto insurance, utilities, dry cleaning, entertainment, car payments, internet, clothing, medical, transportation, credit card bills, life insurance, etc.
If you regularly put away some money for your rainy days, retirement or for investment purpose, include that in your expenses, too.
Step 4: Divide Expenses Into Two Categories: Variable and Fixed
Now that you have the list of your monthly expenses, divide it into two categories. The expenses that stay relatively same month after month will go into fixed expenses column. It comprises of rent or mortgages, car payments, internet/cable services, insurance premium, etc. Mostly, these are not likely to change in your budget.
Expenses such as entertainment, eating out, gasoline, groceries, gifts will be in the column of variable expenses. This is where you can make most of your adjustments when you are under financial strain.
Step 5: Total Up Your Monthly Income and Add Up The Expenses
This is a crucial step. Now you have the sum of monthly income from all sources. Add up all your monthly expenses. Now subtract your total monthly expenses from the total monthly income. If the end result is positive, i.e., if the income is greater than expenses, you are in a good financial position. You can use the excess of cash to eliminate the debts faster, or save for retirements.
In case your expenses are higher than the net monthly income, you need to make some changes. That leads us to our next step.
Step 6: Adjust Your Expenses
Let’s say you earn $2,000 a month and your expenses are $2,500. That means you are spending $500 extra every month THAT YOU DON’T HAVE! You are either borrowing that money or taking out from the past savings.
Your ultimate goal is to figure out what you should do to reduce or eliminate the extra $500 each month. You can try to cut back on the variable expenses. Try to eliminate the expenses that are not absolutely necessary.
Step 7: Review Your Budget Every Month
You need to have a look at your budget every month, just to ensure that you stay on track. When a month is over, take 5 minutes to sit down and compare the budget you had created versus the actual expenses. It will show you what you handled well and what you still need to improve upon.
Do you still have any questions or anything holding you back from creating a budget? Shoot your question in the comments and I’ll answer you.
Are you tech savvy? Next week I will show you how you can easily create your budget using Mint, a FREE personal finance app.
PS: If you don’t have sufficient time to create your own budget, go to the Financial Planning Association website to find out a certified financial planner in your area. They can help you out.
Read next article in series: Tech Savvy? Use Mint to Create and Stick To A Realistic Budget Plan