What is a Budget?
I am always surprised when I talk to people and find out that they do not know how much they make. They have a general sense, but for the most part there are a lot of people that have no idea how much they bring home every month. These are generally the people that also do not know how much they spend every month. Before any financial goals can be set or acquired, sit down and write out how much you bring in. Included in this should be regular wages, side income, gifts, inheritances and any other sort of income that flows in throughout the year.
After figuring out the money coming in, you must figure out how much is going out. There are two ways to do this. The hard way is to keep track of all receipts for a few months. At the end of every month you categorize, compartmentalize, and plug them all into a spreadsheet that can be analyzed and reviewed. The easier way is to pay all your regular bills, and set aside a small portion of cash to pay for the extras that pop up, including eating out, new clothes, movies, and anything else that is not necessary to survive. Over a few months time you will get an idea for how much to designate to each category. Most people will fall somewhere in the middle. If you want to make things evan easier on yourself you can use online budgeting tools such as Mint.com.
There is no wrong way to creating a budget. Personally, I do not even use one. I know how much my regular bills are, and I know how much I need to set aside for savings, retirement, and everything else. Then I put everything I possibly can onto my credit card. Monitoring my expenses takes about 3 minutes each week to make sure there are no fraudulent charges and to make sure I am not spending too much. At the end of the month, I pay the card off completely. Anything extra I move right to savings. Some months there are bills that pop up that I didn’t account for, so I bring that money back from savings to pay for them. That is why after you have figured out your budget, you should make sure to start an emergency fund, which we will talk about next week.
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