6 Steps to Creating A Fool-Proof Budget

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Every adult has a responsibility to manage their personal finances as best they can. As many people soon come to realize, that’s not always an easy thing to do. It requires the individual to be organized and realistic about their financial situation.

If there’s one thing that tends to get people into financial trouble, it’s not taking the time to budget their finances and subsequently following that budget. Without a clear view of where one is going, it’s very easy to fall into the trap of overspending, which often leads to debt issues.

Of course, debt is not always a bad thing. Secured debt (home and car loans) plays an important part in a person’s financial life.

Without it, people probably wouldn’t be able to own a home or maintain reliable transportation to get around. The bad debt is the credit card debt that tends to act as an anchor against one’s financial future.

The Importance of a Budget

A budget is a great organizational tool. It’s serves as a road map to help you manage your money effectively and efficiently.

If you can do that much, you’ll might find within yourself the discipline to avoid unnecessary debt. The real value of a budget comes from you taking the time to lay out all your income and expenses in black and white.

With the facts laying before you, it becomes easier for you to understand your financial boundaries.

Preparing a Personal Monthly Budget in 6 Steps

6 Steps to Creating A Fool-Proof Budget

No one expects you to suddenly become proficient in accounting. Preparing a monthly budget is actually a fairly simple process if you commit to doing it.

It should only take you a few hours to complete the task at hand. To help you with the process, here’s six easy steps you can follow.

1. Promise Yourself You’ll Be Realistic

Before you start the budgeting process, you have to promise yourself you are going to be realistic and thorough.

Even the slightest error could end up painting a financial picture that isn’t true. The quality of your budget will be determined by the quality of the information you put into it.

2. Identify Your Financial Resources

Identifying your monthly sources of income is a good place to start. This is where you would list out your monthly wages, rental income and investment income if applicable.

If you get bonuses, you should account for those monies in the appropriate months.

3. Calculate Your Monthly Expenses

Your monthly expenses should be separated into two categories. You fixed expenses would be your rent/mortgage, car payments, utilities and insurance.

Under the category of variable costs, you would list food, clothing, auto expenses, childcare if applicable, home repairs and any other expenses that might occur. You could list the latter expenses under miscellaneous.

4. Determine Your Short-term and Long-term Financial Goals

You future spending is going to be determined by you setting your short-term and long-term goals. Your short-term goals might include sending the kids to school, planning a vacation or buying new furniture/appliances.

Your long-term goals might include purchasing a home or upgrading to a bigger home, investing in a business or saving/investing for retirement.

Also, your goals should serve as a guide to how much money you need to save each month. Yes, you need to save. You need to save for emergencies, and you need to save to ensure you will have financial security in your twilight years.

5. Lay Everything Out on a Spreadsheet

Once you have listed out all relevant information, you can begin putting you budget together on a spreadsheet with the months listed across the top. First, you list all sources of monthly income followed by a detailed list of your anticipated expenses.

If you set up the calculations properly, you would subtract expenses from income and get what is hopefully a positive remaining balance. If it’s positive, that’s extra money is your discretionary income for entertainment and any extras you might desire.

Further, if the number is negative, you’ll have to look carefully at your lifestyle. There’s a chance you might be living beyond your means.

That’s one of the primary reason people get into debt trouble with credit cards. They are living beyond their means and don’t know how to resolve the issue, so they borrow.

6. Track Your Monthly Progress

Your budget is meaningless if you don’t track your monthly progress. Each month, you want to compare all your actual income and expenses, by line item, to what you projected.

If there are any material differences, you want to take note of what caused the variances. If it becomes a regular issue, you might want to consider adjusting your remaining budget going forward.

Here’s a final tip. The most successful businesses don’t succeed by accident. They plan for success.

They lay out budgets and cash flow projections and follow them to the promised land. If you really want to have financial security, you have to learn to budget your finances and be willing to abide by whatever the numbers say.

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Author: Carol Mendez