Creating a Budget Plan

To successfully get out of debt, the first thing you need to do is learn how to create and stick to a budget. Many people who don’t manage their money well develop financial problems. To change your financial situation, you must understand and learn how to manage your money well first.

Knowing how much money you have to spend and where you are spending it is crucial to developing a workable budget. Since most people do not track their monthly spending, they have no real idea how much money disappears due to small expenses or purchases. Tracking every penny that comes in and out of your bank account, though somewhat tedious, is the best way to figure out exactly where you can eliminate overspending and get your finances back on track. Budgeting is a powerful tool that allows you to gain control of your money, plan for expenses, and communicate your financial needs with others, whether family members, creditors, or financial institutions. Gaining control of your finances will help you fulfill your dreams.

Budgeting is about planning, which is crucial to producing the desired result of regaining control of your money and knowing exactly your financial situation.

• Creating a budget will help you stay better organized when it comes to spending because it allows you to:
• track your personal cash flow;
• get control of your finances;
• save money on a regular basis;
• set and achieve financial goals;
• eliminate unnecessary expenditures, once identified.
• discuss easily with your family members the priorities for where your money should be spent;
• plan for upcoming events and purchases.

What Is a Budget?

A budget is a financial plan; it is a tool to identify how and when money is being spent. The fundamental use for a budget is to save money in advance for known and unknown expenses. A budget lets you organize and control your financial resources, set and realize goals, and decide in advance how your money will work for you. A budget doesn’t have to be complicated; it can be as simple as it is powerful. Your budget needs to help you:

• Understand necessities
• Think before spending
• Cut expenses

How to Set Up Your Budget

There are five general steps for creating a budget. They are:

1. Determine your total monthly income.
2. Determine your total monthly expense.
3. Analyze your expense.
4. Evaluate spending habits; look for ways to cut back on expenses.
5. Track spending to make sure it stays within the budget guidelines.

Budget math is relatively simple: make sure that you don’t spend more money than you have coming in. Determining your income (what you have coming in) is fairly simple; your paychecks, any other earnings or payments to you, and any earnings on savings and/or investments.

Determining your cash outlay (what you spend) can be a little trickier and requires thoroughly tracking every penny you spend to get an accurate idea of your expenses.

1. Determine your total monthly income

You have to know how much money you have coming in each month to figure out what you can spend or save. Income includes you net paycheck (what you actually bring home after withholding taxes, social security and other deductions are taken out of your pay.) List your income for each month within the year, then add those amounts together to get your annual income amount. Include all your income, taking into account the following types of income:

• Salary/wages
• Income from self-employment
• Retirement pay and/or government-source income (e.g., Social Security, disability, unemployment, annuity, and pension payments)
• Interest and dividends
• Alimony and/or child support
• Rents and/or royalties
• Income from trusts

2. Determine Your Total Monthly Expense

Most people, especially those who have never lived on a budget plan, don’t have a clear idea of their monthly expenses. You need to analyze your spending patterns. To get started, keep a record of everything you spend for a four-week period. Collect all your bills, your credit card statements, your checkbook register, and receipts for your groceries, gas or anything else you buy with cash. Don’t forget your ATM withdrawals and debit card purchases.

Use the following list as a rough guide to record your expenses. If you are not sure of an amount for a specific item, go back through your checkbook for the past few weeks or months to get an idea. If you pay cash for items such as fast food, think about how many times per week or month you normally spend money on that item and how much you pay each time.

• HOUSING & UTILITIES
  o Mortgage payment or rent
  o Insurance
  o Taxes
  o Electric
  o Natural gas
  o Water
  o Garbage pick-up
• TRANSPORTATION
  o Car payments
  o Insurance
  o Gas
  o Routine Maintenance (oil changes, tire rotation)
  o Repairs
  o Air travel
  o Rental cars
  o Public transportation
• COMMUNICATION
  o Telephone
  o Cellular phone
  o Voice mail, etc.
• ENTERTAINMENT
  o Cable TV or satellite service
  o Internet access
  o Dining out
  o Bars, clubs, etc.
  o Sporting events
  o Parties
  o Lessons and recitals
  o Clubs
• HOUSEHOLD
  o Groceries
  o Cleaning supplies
  o Laundry
  o Dry cleaning
  o Home improvement projects
  o Towels, linens, etc.
  o Clothing
• HEALTH/BEAUTY
  o Hair cuts, perms, etc.
  o Make-up
  o Medical, dental, vision
  o Weight loss, diet products
  o Nutritional supplements
• OTHER
  o Child Support
  o Alimony
  o Credit card payments
  o Other loan payments
  o Child care
  o Items for baby/elderly
  o Allowances for children
  o Book clubs, magazines, music, etc.
  o Fast food
  o Investments
  o Vacation
  o Spending money
  o Donations to church or charity
  o Gifts (Christmas, birthdays, wedding, baby shower, graduation, anniversary, etc.)
  o Emergency fund
  o Coffee, soda, cigarettes, etc.

When you have assigned an amount to each item, total all the amounts. You have then calculated your total monthly expenses.

Analyze Your Current Expenses: Separate Your Expenses by Type

By examining your spending habits, you will get a good idea of what is important to you as an individual. Group your expenses into the following categories. After you have analyzed your spending, you can determine how important it is to you to spend your money on the items in each category.

• Fixed Expenses
  Fixed expenses are those that remain the same from month to month:
  - Mortgage or Rent
  - Auto loans
  - Insurance premium
  - School loans
• http://www.edebthelp.org/budget-plan.htm
  Variable expenses are expenses that occur regularly but may vary in amount from month to month:
  - Electricity
  - Water and Garbage
  - Telephone
  - Gasoline
  - Groceries
• Discretionary Expenses
  Discretionary expenses are those determined by personal wants that may be controlled :
  - Movies, videos, CDs
  - Sports
  - Eating out
  - Grooming and clothes
  - Concerts and plays
  - Vacations

To help you create a budget, keep in mind the following considerations:

• Know what bills are due and when.
• Know how you spend your money. Get in the habit of saving receipts.
• Plan ahead for large periodic expenses such as property taxes, homeowners insurance, and car insurance.
• Budget for regular maintenance and unexpected repairs. Some experts suggest budgeting one percent of the purchase price of the house for annual maintenance and repairs.

Evaluate Your Expenses and Look for Ways to Cut Back

After creating your list of expenses, examine it carefully. Is each expense within your income or exceeding it? Is each expense necessary? It may be a bit disturbing to actually see where your money is going and how much you spend unnecessary items. Quick stops for things like a cup of coffee or a sandwich can add up without you even realizing it.

Budgeting can help you determine where you can cut back and what you can't change throughout the course of a year. It's an important determination for present and future financial health. Some expenses, like insurance or a house payment, are harder or impossible to reduce. Look at the expenses that are more flexible, like entertainment or food, and find ways to cut back.

Try to reduce expenditures in every budgetary category. Reduce expenditures until spending is brought under control and bills are paid.

Suggestions for spending cuts:

• Cable: eliminate cable/satellite service or cut back on extra subscription channels.
• Telephone: cancel options such as call waiting and caller ID; limit long distance calls. Use discount phone cards or 10-10- access codes for long distance; E-mail instead of calling; try to get by without a cell phone.
• Internet: switch to a cheap Internet access provider.
• Groceries: Cook from scratch and make it healthy; plan meals in advance and shop with a list; use coupons whenever possible; buy store brands, avoid name brands.
• Dining out: brown bag school and work lunches.
• Insurance: shop around for cheaper home and auto insurance.
• Entertainment: rent videos instead of going to the movies.
• Books and videos: use the public library more.
• Turn down the water level on your washing machine and dishwasher if it is adjustable.
• Electricity: turn off lights, TV, PC, etc. when not in use ; run dishwasher and washing machine with full loads.
• Utilities: turn the heat or air conditioning down while you are not home; don't overheat or overcool when you are home.
• Haircuts: give yourself and family members haircuts.
• Banks: find a bank with a no-fee checking account if you don't have one.
• Maintenance: do your own painting and lawn mowing.
• Vacations: suspend personal trips until debts are paid off.
• Others: quit or reduce smoking and drinking. Cut back on caffeine if possible. Drink water.

Track Your Spending on a Regular Basis.

Continue the habit of closely tracking your spending each month so that you can begin to see seasonal trends and patterns. You’ll be better able to adjust to these trends in future years. Keep records of your spending and periodically do a financial checkup. Ask yourself whether you stayed within your budget and if you are making progress toward your goals. Answer honestly if you haven’t, and make adjustments accordingly.

Track your spending daily by category in a small notebook. Keep a zippered pocket in your car for receipts. Give yourself a dollar amount to spend each month for each category, such as food, gas, entertainment, etc. As you spend money, keep a running total so you know how much of the budgeted amount is left for the month. When the budgeted money is gone, discipline yourself not to spend money for that category until the next month.

Do your best to live with those limits, and in each subsequent month, adjust the category amounts according to your honest assessment of what you can live on comfortably. The hardest part of a budget is learning how to stay within your means. Discipline yourself to stick to it.

Financial Management Software Can Help You.

A financial management program such as Quicken or Microsoft Money can make your budgeting job a lot easier. These programs allow you to categorize where every cent goes each month, keep a running total of everything, and print out graphs and reports from your computer. Your personal computer may have come preloaded with one of these programs. If not, these programs are really worth the investment and can help you to stick to your budget.

Many banks are now offering free PC banking in connection with personal finance software. The software will help you connect to your bank via the internet (or your bank may use web-based banking), and download the checks that have cleared your account, directly into your personal finance software. Then you indicate an expense category for each check.

In addition, you can do a basic comparison of budget versus actual expenses by category, or you can enter more detailed information such as investments, assets, liabilities, etc., and print personal financial statements showing your net income and net worth. You can even get a projected financial status showing how much you will spend, save, or be most vulnerable financially in future weeks or months with personal finance software.