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Create a Budget the Easy Way
Many people think creating a budget is a long and challenging process. But the truth is, a budget is just a plan and guideline that you follow to ensure that you end up where you want to be financially. Without a budget, you may make choices based on erroneous assumptions. With a budget, you can make financial decisions based on reality.
Add Up Your Income
Your budget starts with your income. You need to know how much money you actually have to spend each month. You can add up your gross income, or your net income if you remember only to budget the money you really have access to.
For example, if you have your own business and your income is $50,000 a year after business expenses, you still have to pay taxes (including self-employment tax) from that, which means you don’t have $50K to spend. Knowing what you really have left to spend will help you make better choices.
Subtract Your Expenses
This is where you take away the expenses such as rent, credit card payments, utilities, and so forth from your spendable income. Everything you spend each month, from coffee to your mortgage, goes into the category of expenses. This is going to tell you if you make enough money to cover those expenses.
Organize Your Expenses
Once you have added up all your expenses, one good thing to do is to separate and organize your expenses based on the type of expense. Some expenses are essential and fixed, and some are essential and flexible.
For example, your mortgage is probably a fixed expense that you cannot control once you buy the house. However, the amount you spend on utilities can be a flexible expense even though it is an essential one. Also, some expenses are only periodic. For example, you only pay your property taxes yearly and these are not usually very flexible.
You’ll also want to organize all your non-essential expenses, which can be flexible and periodic as well as fixed, just like essential expenses. However, they’re not needed for you to stay alive, so they are considered non-essential. They are classified as wants.
One example of a need is a healthy dinner, but the type of dinner you choose to have, if it is more than what is essential for your health, should be classified in your mind as a want.
Track Your Spending
It can help to take some time, such as a month, to track your expenses. However, if you are like most millennials, you use your debit card along with a bank account more than you use cash or checks. This means that you can likely use your online bank account now to look over what you’ve purchased the last six months to find an average for yourself, without waiting and tracking now.
What you can find out depends on the type of account you have and whether the system is categorizing your expenses correctly. You can go in and fix that, so you can generate reports on your past spending to learn clearly what you are doing with your money.
Track Your Investing
Don’t just trust your financial advisor. Look at your accounts, at least monthly, to make sure the money is being deposited and used as you believed it would be when you signed up. By checking and tracking, you can know whether or not you’re going to meet the goals you set, and how to adjust (if necessary) to ensure that you do.
Try a Specific Plan
When setting up your budget, it helps to use a specific, tried-and-true budget plan like the 50-20-30 plan created by a Harvard University bankruptcy expert named Elizabeth Warren. This provides a new way to look at your money. This plan makes it super-easy to make spending decisions. Let’s look at how this plan works.
Basically, your money is separated into three categories: needs, wants, and savings. 50% should go to your needs, 30 percent to your wants, and 20 percent to savings. The plan is developed on after-tax income. If you work for yourself and pay self-employment taxes, make sure you get your figures right by subtracting your business expenses and state and federal taxes before coming up with your “income” number.
Needs are expenses that are mandatory to live a healthy life – such as a mortgage, utilities, healthcare, basic groceries, transportation, and childcare. Wants include entertainment like cable, phone, eating out, fancy food, personal care like professional hair care, shopping for non-essential items, travel, and so forth. Savings includes everything you save but can consist of student loans and credit card debt, because you should try to pay those off as fast as possible.
This system is flexible because you can use your wants to add to your savings and to upgrade your mandatory expenses. For example, if your budget says you can only live in a $750 apartment but you really want the $1200 apartment, some of that money should come from the “want” category but not your savings category. Also, some of your savings, if you happen to have a lot of debt, can also be included in your want category.
Another plan to check out is a zero-based budget. The way this works is that each month, you zero out your money. So, if you have $5000 each month, you set up a budget that uses every penny so that your income is equal to your expenses every single period, and nothing carries over. This plan is favored by financial experts like Dave Ramsey.
That means that if you end up with a windfall such as a birthday gift or unexpected bonus, you need to create a new budget line for that amount so that you eliminate it from your books. Perhaps you put it in savings or maybe you spend some of it on a new hairstyle, but it should be accounted for in some way.
To make zero-based budgeting work, you’ll need to include all your income and your monthly expenses. Everything that spends down the money is considered an expense, including investments and savings. If you start this and you’re showing a deficit that is causing you to use credit, it’s imperative that you earn more money to cover the extra or cut your expenses.
The main thing is that you create a plan and document it. Write down your plan. Understand your plan and know your plan. Regardless of the method you use, your plan should include both short- and long-term goals so that not only do you take care of today, but you also take care of your future in a realistic way. It’s essential that you’re honest with yourself about this process.Other Details
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