Steps to Do a Budget
A budget helps you to achieve your life goals as well as financial security. A good budget does more than track income and expenditures. It identifies potential tax deductions and creates a working plan for managing debt and achieving wealth. You may feel less stress knowing that you have streamlined your finances to coordinate with your goals, such as saving for a special vacation or an approaching retirement.
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Gather and Categorize Records
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Separate your expenses for the past year into budget categories, such as housing, food, insurance, loan payments and utility payments. Go through your checking and charge account statements to account for monies spent for which you do not have receipts, or estimate when you do not have a record. Going back 12 months catches seasonal expenses, such as winter heating bills or summer child care expenses.
Add Expenses
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Total the amounts in each category. When adding up the amount spent in each category, include unplanned spending such as fast food, cash donations at work and impulse purchases such as clothing or jewelry.
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Add Income
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Add your income for the past year. Do not include gifts or the occasional side job, as these are nonrecurring forms of income. You base a successful budget on recurring income. If you have irregular income, such as a freelance writer does, then base your budget on the actual amount of income, not the amount billed to your clients.
Compute Monthly Averages and Cash Flow
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Divide your yearly income by 12 to ascertain a monthly average. Divide each category of your expenses by 12 to reach a monthly average. Subtract your expenses from your income to determine if you have positive or negative cash flow.
Steps to Correct Negative Cash Flow
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Arrange to stay afloat if your expenses exceed your income. Some things that you can do to reduce expenses are arrange for budget billing with utilities, slash the food category to the bare minimum, ride the bus instead of driving, contact your creditors for a temporary reduction in payments and review your insurance policies to either reduce coverage or increase deductibles. Get a second job to increase your income while lowering your expenses.
Build an Emergency Fund
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Assign excess money in the budget to building an emergency fund of several months' expenses. A good rule of thumb is to save as many months in the emergency fund as it takes the average American to find a job.
Pay Down Debt
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Pay down debt after the emergency fund is established. With one method, called snowballing, you put all extra money to the smallest debt until paid in full. Then take that amount and add it to the normal payment for your next smallest debt, paying that one off quickly. Then take the amount of both of those payments and apply them to the third smallest debt, and so on.
Prioritize Your Goals
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Assign an amount and a due date to each goal. Then divide the amount by the number of months to the due date to find out how much needs to get set aside in the budget every month. For example, if you want to buy new furniture in two years and the price is $3,000, then 3,000 divided by 24 months = $125.
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