Rules for Determining a Budget
A budget prioritizes your spending and saving goals. It's a tool to help you decide how you want to spend your money, before you spend it. A budget allows you to make financial decisions before you're in a store, feeling the temptation to buy. A budget is the key to building wealth, because it gives your savings a purpose, and gives you reasons to cut back on your spending.
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Save Every Month
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It's important to contribute money to savings each month. Saving and investing money will help you build wealth, gain financial security and prepare for your retirement. Give the money you save each month a specific purpose. For example, you may want to save 15 percent for your retirement account, but then save an extra $300 a month to build an emergency fund. You can also save money to go on your dream vacation, or for a down payment on a house.
Balance Your Budget
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Balancing your budget is the key to making your budget work. Expenses should never exceed your income. Throughout the month you can transfer money between categories, to cover areas where expenses are higher than you thought they would be. Tracking your budget each month will also help you stop spending when you've reached your limits in each category. If you don't track your spending, you can overspend without knowing it. This is even more important if you're married and budgeting with a spouse.
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Prioritize Your Spending
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Make sure that your spending matches your goals. This means that you choose which items are the most important to you, and make sure that they're covered before other expenses. One example is making savings a priority, by putting money in savings as soon as you're paid. This will prevent you from spending the money accidentally. List your spending categories in order of importance. When you have to make cuts, start at the bottom of your list. The order should be necessities, monthly obligations (such as credit card bills and student loans) and then entertainment costs.
Take Care of Necessities First
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It's important to understand and label necessities correctly. A necessity is something needed for survival, such as food, heat, and shelter. Transportation to work may also be a necessity. Satellite television, eating out, and unlimited texting options are not necessities. Neither are credit card payments, when you can't cover your rent. Make sure you cover your basic needs, and your family's basic needs, before you add anything else to the budget. Entertainment and fun spending should be at the bottom of your priorities.
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References
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