Creating an effective financial plan on a monthly basis could be seen as a mundane task, but all the same it is a very important one that needs to be done. Being told how to create a budget could be essential in helping one dodge all those tough financial spots that occur every now and then. If these rough patches occur more often then one definitely needs to start budgeting to get control over the situation.
Firstly, start by getting all of ones financial paperwork gathered up. This will be documents such as, bank and investment statements, utility bills for the previous month as well as any other items that one may have to show income and expense amounts for the month. This step is mainly to ascertain what, on average one spends in a month.
All money received will be written down as income regardless of how much it may be or where it comes from. Self employed individuals will have to record two separate budgets; one for their business and one for personal use, but they should record what amount was taken as a salary. People that receive regular amounts should only use their net salary as the amount received; all income is then added in order to get the total earnings.
Once income is determined a monthly expenses list must be done. Jot down all expenses that one may have for that specific month. These should be things like repayment of mortgage, car and other loans as well as insurance, utilities, groceries, entertainment and all savings amounts; this should include retirement savings.
This list of expenses needs to then be divided into two parts; firstly fixed and then variable items. Fixed amounts are all items that one has to pay every month and have set amounts payable. Examples of these are rent or mortgage, internet and cable services, credit or store card payments as well as car payments.
Variable expenditure would be all those items that change such as groceries, entertainment, gas; these are the things that one can only estimate what amounts need to be spent. This list is the most important when one needs to look at making any adjustments as they are flexible.
Total expenses must be deducted from the total income to see if the outcome is positive or negative. If one has money leftover then it is an ideal situation whereby one can either add to savings or work to pay off debt sooner. If the tables are turned, then one will have to play around with the variable expenditure amounts until there are sufficient amounts for each item.
As everything always looks good on paper until put into practice, it would seem that everyone will have to compare what was recorded with what one has, in fact, spent. This needs to be done the last day of each month before budgeting for the following month. Children need to be taught how to create a budget to ensure that they are able to learn to manage their finances correctly when they are adults.