Before you begin to manage your money, you need to determine your financial goals. Create a list of short-term, medium-term and long-term goals and be realistic about your goals. The reason many Americans have money problems is that they have not established what they want to do with their money and they spend it randomly. Clear goals will help you establish a financial plan.
Once you have determined your financial goals, you need to identify your income and expenses to create a budget.
You will need to create a list of everything you spend money including (expenses):
- Household expenses (mortgage, rent, property tax, insurance)
- Utilities (water, gas, electric, sewage, trash, cable, internet)
- Phone (cell, landline)
- Health care (insurance, doctor visits, prescriptions)
- Transportation (car payment, insurance, repairs, fuel, maintenance, bus fare)
- Debt (loans, credit cards)
- Memberships or Subscriptions (music, newspaper, magazines, gym)
- Entertainment (dining, movies, traveling)
- Personal care (haircuts, clothing)
- Non-routine costs (parties, birthdays, weddings, holidays)
You will also need to create a list of all the sources you bring in money (income):
- wages (after taxes)
- Self–employment income
- Child tax benefits
- Child maintenance & spousal support
- Social security benefits
- Any other regular income
Once you have determined all of your expenses and income, you can now create a budget.
You can use pen and paper, an excel worksheet or an electronic budgeting program, but financial software certainly makes the job a lot easier. It also reduces errors.
If you prefer the pen and paper method, you need to purchase an accounting ledger designed for credits and debits. Credits include all of your income sources debits include all of your expenses. You will also need a calculator.
If you prefer an excel worksheet, you will need a computer to create an excel spreadsheet including formulas to track your credits and debits.
If you prefer electronic budgeting software, you could try Intuit’s Mint Money Manager. It is probably the easiest solution and it also creates running totals, makes suggestions, and shows how debits and credits influence each other for your bottom line.
Once you have established your best budgeting method, you can now take all of the income and expenses you have and put them into your budget. This is where many budgeters get a bit nervous. In order to have a clear picture of your finances, you need to be honest and accurate when inputting all of your debits and credits. You may even find out that your incoming amount might be smaller than the outgoing. However, your newly created budget will help you control that.
You will need to establish outgoing categories after you determine your grand total. The next step is breaking debits into subcategories, such as Utilities (electric, water, etc.), Secured Debts (mortgage, rent), Unsecured Debts (credit cards, loans), and Discretionary Spending (entertainment, personal care, etc.). Many budgeters find their Discretionary spending adds up fast. A few dollars here and there for dining out, movie tickets, a new shirt, etc. can total more than a fixed monthly bill. Often budgeters find that this is the subcategory in which they can create the most change.
Knowing Where Your Money Goes
Now that you have created your budget, the goal is to get your debits (expenses) less than your credits (income). You can approach the monthly budget more realistically, once you have established firm numbers. You need to evaluate your debits to determine areas to divert money toward debt reduction, saving, and retirement.
Pay Off Debt
Many families that take the time to create a budget do so with the goal of debt reduction. Knowing where your money goes allows you to determine ways to curb your spending and reallocate money. In turn, this will allow you to pay more than the minimum payment on debts each month, obviously, reducing debt faster and pay less interest.
Budgeting is both simple and complex. It’s a matter of knowing what you earn, what you owe, and where the money is spent. What makes it complex is deciding where to cut back and where to divert more money. A realistic budget can help you meet your financial goals and establish a solid financial future for your family.