Steps in Budget Preparation

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Preparing a budget is not usually a task that people think of as fun; however, it is necessary if you want to know where your money is going and have more control over your financial situation. There is more to preparing a budget than simply sitting down and deciding how much to spend on different items, however. You must take the proper steps to prepare your budget if you want it to be a useful financial tool.

Track your current spending habits. Carry a notebook with you everywhere you go, and keep track of how much you spend and where you spend it. Sit down at the end of the month, and determine where you are spending money and how much you are spending everywhere that you spend money. Don't forget to include your regular bills like house payments, utilities, and insurance in your spending.

Calculate your income. Figure up exactly how much money you bring in each month after taxes. Include all sources of income, including paychecks, investment income, and income from freelance work. Determine a specific amount that represents how much money comes into your bank account every month.

Modify your spending habits so that you are spending less than your income if you are overspending. Trim excess items like expensive coffee drinks from your spending first; bills like housing and utilities are difficult to reduce. Remember that decreasing your spending is always easier than increasing your income.

Divide your income by how much you want to spend on different categories. Allocate money for the necessities like food, housing, and utilities first; budget money for categories like entertainment with whatever is left after taking care of the necessities. Ensure you are putting at least 10 percent of your income into savings in case of an emergency.

Tips & Warnings

  • Stick to your budget once you have prepared it; budgeting does no good if you don't pay attention to it.
  • Don't forget to account for annual expenses like homeowner's insurance when you are drawing up a monthly budget. Divide the yearly cost by 12, and budget that amount each month for annual bills.

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