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Budgeting 101: How to Create a Budget That Works for You

bookkeeping, accounting, taxes

Everyone should have basic knowledge pertaining to their finances. When it comes to money, nobody will ever have your best interest at heart more than yourself. So it’s important to educate yourself about money and start making positive changes in your life and for your future. You work hard to earn it so why should you let it be the boss of you?

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Everybody wants freedom to spend more time with their family without feeling guilty about not having enough money to support them . If you learn to do it right, you might be able to live a life where money is not an issue yet still be able to spend quality time with your family.

Money management is one of the most important things in life, yet it’s not something that is taught in school. So you do all our schooling and graduate without having any knowledge about money management.

Then, you start working small jobs after school and begin to be offered credit. Suddenly it appears that you can afford anything you want as long as you have a credit limit. You start living beyond your means and begin to live paycheck to paycheck. Before you know it, you owe the banks more than you’ve bargained for and find yourself borrowing more to be able to continue to afford your same lifestyle.

All of a sudden you are in over your head, owing more than you care to admit and unhappy about your life and your finances.

Finally, you think about declaring bankruptcy and you are miserable and depressed. It’s time to stop this vicious cycle. If this sounds like you and you are tired of not making progress financially, you need to start making changes to your finances and this start with creating a budget.

What’s a Budget?

Budgeting helps you keep track of your money so you know where you are spending every dollar you earn. This allows you to find ways to eliminate unnecessary expenses and save more of your money for more important things. You would be surprised where you spend most of your hard-earned money. Which is why it’s important to do your budget every month before it begins to track your expenses and make sure you are spending your money efficiently.

So how do you budget efficiently? First, you need to figure out how much you are earning so you know the amount of money you are working with.

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How much are you earning?

This is an important question you need to ask yourself and the first step to figuring out how much you can spend. If you’ve never asked yourself this question and have always just spent money on whatever you felt like, you’re most likely in your current financial distress because of it. 

You can only spend up to your maximum revenue. You need to know how much you are earning so you can tailor your expenses around it for better money management.

You need to figure out whether you are paid weekly, bi-weekly or monthly . It’s easier to budget for a month at a time. So figure out how much your salary is for the month and take note of it. This will be our base to calculating how much you can spend.

If you work on commission or on call, it might be hard to figure out how much you are earning . However, you can calculate your average earnings for the last 6 months to a year to give you an idea. This will not show you exactly how much you are earning but it will at least help you get an approximate value of your monthly earning potential . 

However, when preparing your budget for the coming month, use your judgement and try using the least amount that you suspect you will receive. Especially if you have some insight that your salary might be reduced for that month. It’s always best to do your budget with a lesser amount, that way it’s easily adjustable to a higher revenue if you were to get more.

Once you know how much you are earning, you can effectively allocate every dollar you earn. The next step would be to find out how much you are currently spending and where your hard-earned money is going.

How much are you spending?

You would be surprised how much your expenses amount to in one month. Which is why it’s important to know beforehand if you can afford the things you are spending your money on.

To find out how much you are spending, you would need to verify your past purchases. This is the part where you checkyour receipts, your checking account and your credit card statements to determine how much you are spending.

There is an easy way of doing this using an Excel spreadsheet. First, put your monthly income at the top. Then, gather all your expenses into an Excel sheet for a month. If you usually use your credit card or debit card to make purchases, this will be an easy task. Most banks will allow you to export all your expenses from a credit and debit card into an Excel sheet for your convenience. If you have automatic withdrawals, these will appear on your statements as well.

Deduct your expenses from your monthly income to see if you have a negative or positive balance. Once you have this data, you can see where your money is going and you can determine if you’ve gone over your monthly income. This is where it can get scary and this is where you find out the reason why you’ve had so much trouble managing your money.

Two things might be possible: you’re either spending too much mostly on things you can live without, or you might not be earning enough to begin with.

Now that you know how much you are earning as well as what you spend your money on, you can put together your budget so you can manage your finances efficiently.

Budget based on your past expenses

While a budget is usually created for a month at a time, feel free to tailor to your needs based on the frequency of your income and expenses. It’s best to do your budget ahead of time so that you can allocate your funds efficiently. This process makes it so that you don’t spend more than you earn and it also helps you allocate more towards other important things like saving for retirement or paying off debt for example.

Start with important expenses

First, make sure you include the most important things i.e mortgage, rent, food etc as those are the things you can’t go without. So your most important expenses should be shelter, utilities, food, transportation to go to work. It’s best to start with these in your budget so you can prioritize your spending.

After you’ve added your most important expenses to your budget, you can start adding things like clothing, insurance, debt payment and savings. Notice that I didn’t include clothing in one of the most important expenses? This is because it’s not something that’s recurrent. Normally, as adults our clothing last a very long time because we’re done growing. However, if you have kids, you should add clothing to the most important expenses because as we all know, they can outgrow them fairly quickly.

Don’t forget to include debt payments to your budget. Before you are able to fully be in control of you finances, you need to not have any outstanding bad credit card or line of credit debt. Most credit cards are offered at about 20% interest and paying that much interest on debt just adds to your monthly expenses.

Make a budget every month

Every month is different and your expenses can be too. Some months are just slightly different but there is usually a similarity to the type of expenses you have. For example, things like insurance (life, health,…), cable, internet tend to not be that different from one month to the other.

However, your spending can differ a lot when it comes to food, entertainment or gas for example. This is why it’s important to budget before the month begin and do your best to stick to it as much as possible.

Plan for unexpected expenses

Don’t forget to plan ahead for emergencies. Put money aside every month for unexpected expenses. This will really come in handy if you have an unexpected purchase you need to make and it will prevent you from adding to your credit card debt as well. Make sure you only spend up to your maximum monthly income.

Don’t forget to add a savings section to your budget. It’s important to put money aside in a savings account for retirement.

Remember your goals

Budgeting and making plans before the month begins is the easiest part. You need to do your best to stick to your plans as much as possible. Don’t forget why you are budgeting in the first place. Perhaps it’s so you can get rid of all that debt weighing you down, or you’d like to start saving for retirement or for a down payment on a house. Whatever it might be, keep reminding yourself of that as often as possible to keep you be motivated and know that there is light at the end of the tunnel.

Posted in Pers. Finance, Personal Finance



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