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How to Create a Budget

by nick

With the economy still in turmoil, it’s never been more important to get our finances in control. The most effective way to do this is to create a budget. I’ve always struggled to keep to a budget. But when I have, my financial situation always improved. My problem is that I get lazy, stop making time to review my budget, and wing it with my finances each month. Although I don’t start spending mega bucks, I’ve noticed that when I’m not following a budget, my financial situation deteriorates and doesn’t improve. And as men, to be successful we need to continuously improve. So today I’ll be creating a budget and I’m going to explain how I’ll be doing this.

Why Create a Budget
When you’re a young and independent man, your income is likely limited. You’re constantly living off your last dollar in order to survive. One tool that’ll help you get out of this situation is a well thought out budget. The benefits of having a budget are:

Puts you in control. A man is always in control. But when you don’t have a budget your money controls you. You need to be the man with a financial plan, not the man who’s in debt up to his eyeballs.

Reduces Stress. If you don’t control a budget then you’ll end up not having a clue about how much money you have in your account, if any at all. The result – you’ll end up living off your overdraft whilst constantly paying charges and fees. Not knowing how much money you have in your account can cause a lot of unnecessary stress. You don’t know if you’re going to have enough money to pay the bills; you don’t know if you’re going to have enough money to pay the rent; you don’t know if you’ll have enough funds to cover an emergency should one arise. By having a budget, you can know exactly what’s coming in and what’s going out and concentrate on more important things.

Increases confidence. When you know exactly where your money is going, you’ll feel more confident and in control. Also, having a budget allows you to make decisions quicker. Instead of struggling to make a decision on every purchase, you can just check your budget, see if you have enough money available for it, and then make a decision.

How to Create a Budget
Regardless of how your expenses and income compare right now, it’s time to get excited, because you can easily change it. If it’s bad you can make it so much better. If it’s good then you can still make it even better. Here’s how to create a budget.

Calculate your monthly income. Collect your pay slips together and work out exactly how much you earn per month. If you’re self-employed or earn a bit of cash on the side, calculate a close estimate of how much you bring in each month. You need to know how much money you have to work with before setting a budget.

Categorize your expenses. Make a list of all your expenses and split them into two categories; fixed and variable. Fixed expenses are those that stay about the same each month. Fixed expenses include things like rent or mortgage payments, car payments and loans. Variable expenses are those that you can fluctuate from month-to-month. Variable expenses include things like groceries, eating out, entertainment and clothes shopping.

Subtract your total fixed expenses from your total monthly income. The amount that’s left over is what you can use for your variable expenses. If your fixed expenses exceed your monthly income – you’re in trouble. So, if you’re income is $1,000 and your fixed expenses are $1250, that means you spend an extra $250 each month that you don’t have! And we haven’t even covered your variable expenses yet! Cut the cable, sell your car, downgrade your cell phone plan, move in with your parents or get a roommate to reduce rent costs etc.

Set your variable expenses. You now know how much money you have left over once you’ve paid your fixed expenses. It’s now time to start budgeting for your variable expenses. Unlike fixed expenses, you have a level of control over your variable expenses as they can differ from month-to-month. It’s an area that you can cut back on to gain more control of your finances.

The two most important variable expenses are a retirement and emergency fund.

A retirement fund is essential as we can no longer rely on our jobs or the government to fund it. Set aside a small amount each month. It soon adds up and you’ll appreciate it in your older years.

You should also budget an amount of money each month for an emergency fund. You’ll be grateful for this money when faced with an emergency such as sudden unemployment or car repairs. Even if you only put away a little bit of money each month to start with, something is always better than nothing. It’s often recommended by financial experts that we should be saving for three to six months living expenses. So, if you suddenly became unemployed, you’d be able to cover your rent/mortgage and other fixed bills for three to six months whilst looking for another job.

In addition to a retirement account and an emergency fund, you may also want to budget for expenses that come regularly during the year; Christmas and birthday presents, vacations, etc.

Subtract your fixed and variable expenses from your monthly income. The aim is for your expenses to be less than your total income. If they’re not then you’ll need to adjust your expenses so they are. This may mean cutting back or cutting out things like going out for drinks every weekend. If you have any surplus cash, put it in your emergency or retirement fund.

Keep an eye on your spending. Once you’ve created the budget for each month, you need to keep track of every single penny you spend to ensure that you stay within your budget. A great way to track of your spending is Mint.com. You can connect your account to Mint, and each week you get a report telling you how much you’ve spent on food, gasoline, etc. You can also get bill reminders sent to your cell phone.

Another method of keeping track of your spending is to put the money you budgeted into separate envelopes, depending on what the money is to be used for such as going out money. You can only use the money in the envelope for that month. So, if you have a heavy night and spend all your going out money, you’re not going out for the rest of the month.

Review your budget. Every month, go over last month’s budget to assess how you did. You’ll be able to see where you did well and where you went wrong. After you review, set next month’s budget.

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