It has been
estimated that less than one in five American families have a
formal, written budget
. Many people see budgeting as something
painful, restrictive and tedious. If yours is one of
these families, you may not fully understand budgeting.
A budget is nothing more than a plan - a plan for saving
and spending.
Budgets are designed to do two things. First, they
help keep spending under control. This is the part many
people do not like, usually because they wait until they are
in financial difficulty to develop a budget.
Second, budgets ensure that you take the necessary actions
to reach your financial goals. This is the real benefit
of budgeting. Again the concept of paying yourself first
comes into play. This means that saving for goals should
be the first thing that you do, not the last. Savings
should not come out of what is left over at the end of the
month. You probably know that this does not work since
it is unlikely that any money will be left over.
There are four attributes of good budgets:
- Budgets should be realistic
- Budgets should provide for achievement of goals
- Budgets are balanced which means that income and
spending (including savings) are equal
- Budgets have flexibility
So, what can you do to establish a budget?
- The first step in setting up a budget is to figure out
where your money comes from and where it goes and in what
dollar amounts. This is best accomplished by keeping
track of your income and spending for a month or two before
setting up a budget. This helps ensure that your
budget is realistic. Start with your income. Write down your expected
income for the upcoming month.
- Next, use this information to set up your first budget.
Working item by item, write down how much you expect to
spend on necessary expenses in the upcoming month.
Include any monthly payments for student loans, home
improvement loans or any other type of installment loan.
Don't forget to
include automatic monthly charges like your Internet Service
Provider, gym membership or car insurance. Estimate amounts for each optional expense listed.
Also include in the budget the savings amounts you will need
to set aside to achieve your goals.
- Finally, put your budget in motion. Throughout the
month, keep track of your income and spending, being careful
not to spend more than what you planned. At the end of
the period assess how you did and set up a budget for the
next time period making adjustments as necessary.
Don't be discouraged if the process is difficult for the
first few months. The payoff will come as goals are met,
financial pressures diminish and a feeling of control is
developed.
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