If your money situation feels out of control and you are living paycheck to paycheck it may be time to set up a personal budget. In its simplest form a home budget is based on expenses and income. It is the best way to regain control of out of control finances because it gives a quick and easy way to see exactly where your money is going.
The best way to do this is the old fashioned way, with a notebook and pencil. There is no need for fancy spreadsheets or financial software at this point; you just need to get a handle on what your money is doing. So with notebook and pencil in hand it’s time to start setting up your personal budget.
When starting out sometimes it is a good idea to write down your financial goals. Are you getting out of debt? Saving for a future big purchase? Want to retire early? This will help you use your new budget for the right reasons and will help keep you motivated during the process.
Once your goals are written down it’s time to get into the nitty gritty of budget building. Get out your check book register and all your monthly bills for the last three months. Leave nothing out; groceries, gas, gym memberships, credit card expenditures, utilities, insurance payments, mortgage’s, that vacuum you financed, and anything else that you can think of.
Put each expense in the proper column or row in your notebook and then add each of them up and divide by three. This will give the average expense for each item on a monthly basis. This is the point where you will begin to see just where your money is going allowing you to identify areas where you are probably spending a little too much that could be put to better use.
The next step is to add up all your monthly income from your job or any other source of income you may have. Compare your monthly expenses to your monthly income; if you have less income then expenses you need to seriously work your way through your budget and cut as much as possible to get back to a positive cash flow.
Now that you have a snapshot of where your money has been going it is time to tell your money where to go so it works for you. This time you are looking a month into the future. Go back through your expenses and list out the important ones that must be paid and their payment due dates. Mortgage, utilities, transportation costs, food, and such are some examples of these expenses. Subtract these from your monthly income and what’s left over can be used for other expenses.
The important thing to remember when making a budget is that every dollar should be accounted for in the budget. No more just spending money on a whim. If it’s not in the budget you don’t spend money on it unless you move money from another budgeted item to cover it. This keeps you from spending more then you make. And ultimately that is the reason to set up a personal budget.