Guidelines to Follow When Establishing a Budget

Budgeting involves careful allocation of your financial resources.

Budgeting involves more than simply creating a list of debts to which you attach dollar figures. Although this is a step in the process, it should be the last, rather than first action. If you take the time to do it correctly, creating a plan can remove financial disconnect from your life and make establishing and following a budget easier. While the budget you establish will be unique to your situation, general guidelines can provide a framework to follow.

Make It Personal

Financial disconnect occurs when your budget is not a reflection of you. Think about what is important to you, think about what you want from life and understand that no matter what your dreams are, they can, and should be part of the planning process. Put your dreams on paper, give them a timeline and make this the first page you see when reviewing your budget. Having this information in front of you can go a long way toward helping you stay on track, no matter what your current financial situation.

Analyze Current Spending Habits

Once you know what you want, it is time to figure out where you are. Information is a crucial aspect of establishing a budget and essential for eliminating financial disconnect. Gather information and analyze your spending habits. To accomplish this, set a time frame such as the next two weeks or a month and record every penny you spend, where you spend it and what you purchase. Analyze your spending habits and make an honest assessment of whether your current spending may be undermining your ultimate goals.

Know Your Creditors

Create a spreadsheet or list that includes detailed information for all your creditors. Include contact information, the total balance you owe, the interest rate, monthly payment and payment due date. Identify the type of debt, such as a credit card, student loan, medical bill or car loan. Although you can arrange this list in any way you choose, it may be helpful to arrange credit card debt in descending order of the interest rate to help decide which to pay off first.

Allocate

Set budget priorities and goals by calculating your total net monthly income. Allocate your income to provide a framework for spending. Deduct 10 percent for savings and another 35 percent for housing and utilities. The remaining 45 percent is what you have to work with each month. Create another spreadsheet or list with a category for your total monthly income and categories to list your monthly expenses. Add amounts for fixed expenses, such as a car payment, student loan and the minimum payment on credit cards first and then add flexible expenses such as food and clothing.

Prioritize

If your current income does not cover your monthly expenses, adjust budget amounts starting with flexible expenses. Look again at your spending habits and see where you can make changes, consider temporarily eliminating nonessential services such as cable television or consider a second job. If your current income surpasses your monthly income, use the excess to pay down debt or increase monthly savings.

References

• Bank of America: Building a Budget
• Bankrate: Secrets to Creating a Budget
• Family Credit Management: Personal Budget Guide for Christians

Resources

• Mint: The Best Free Way to Manage Your Money