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Many people find it impossible to save money without a budget, which is simply a plan for spending and saving money. A budget can accomplish many goals:
This Financial Guide shows you how to develop and put yourself on a budget, thereby gaining the positive effects of proper cash flow timing and money management. If you need any help in preparing your budget, contact your financial advisor.
The first thing you need to do is to look over the past years worth of income and spending. This "cash-flow analysis" will lay the groundwork for the budget you will create. Youll need your checkbook, your credit card statements (if available), and your most recent tax return. This will give your sufficient data to analyze your spending and income for the past year.
Using ledger paper or notebook paper, list your income for a one-year period, and break down the amounts monthly and yearly. Include the following types of income:
Your income analysis might look something like this:
Your Fixed Expenses
Add up the expenses that generally do not vary much from month to month, and break them down monthly and yearly. Make sure you include the following categories, whether or not theyre immediately evident from the past years bills:
Where the amounts vary by month, as with a phone bill, add up what you paid for the year and divide by twelve to get the monthly amount. Divide bills that you pay yearly or quarterly by 12 to arrive at a monthly amount. This will help you to arrive at a more functional budget. If you have large credit card debt, indicate the amounts you actually paid, not the minimum monthly payments.
Your Variable Expenses
Next, add up your variable expenses for the previous one-year period, using your checkbook and credit card statements. Be sure to include the following:
Estimate if you need to do so. Heres what your variable expenses might look like:
Youll be able to tell whether youre overlooking any variable expenses by subtracting the total yearly amount you arrive at for variable and fixed expenses from your yearly income figure. If this amount is the amount you put away in savings for the previous year, then you can be pretty certain that youve included all of your variable expenses. If there is a large gap between income minus expenses and the amount you saved, do some digging to try to find where the extra money went.
Your budget should tie in with your financial planning goals. For instance, you may have done some work on your retirement plan, and decided that you needed to save $20,000 per year for the next ten years to accumulate the nest egg you want for retirement.
Or you may be saving for a new home, and determined to save $5,000 per year for the next three years to come up with a down payment.
You may also want to reduce credit card debt or pay down a mortgage with your increased savings.
In this step, decide how much you want to put away each year and what you will do with the savings. Your saving goals will depend on the above-mentioned financial planning goals, as well as on your age and income level.
If you want to save more than you have been saving, then youll need to cut down on optional expenditures. To do this, youll enter an amount under "budgeted amount" that is less than "last years actual."
Now its time to actually create a budget. One simple approach is to use one sheet of paper for each month of the year. Use ledger paper or use 8-1/2 by 11" paper used in "landscape" format (used horizontally instead of vertically).
Each sheet of paper should be headed by the name of the month. Once youve come up with Januarys version, you can photocopy that 11 times, since each months version will be the same.
Each months budget sheet might have five columns:
Here is a partial view (showing just two expenses) of what your monthly budget might look like:
Arrange the items in whatever way is convenient for you. Make your budget easy to use; this will help ensure that you use it. If you prefer to categorize your expenses in an orderly way (fixed vs. variable or optional vs. mandatory), then do so. If you prefer to categorize them in the order in which they come up during the month, or by the manner in which they are paid (cash, check, or credit card), then do so.
It takes discipline to record each amount in your budget as you pay it, but the discipline will pay off at the end of the year, when you will have a clear picture of your spending.
At the end of each month, and then at the end of the year, look at your monthly totals to see whether youve under- or overspent your budgeted amounts. Performing a monthly and yearly review will help you to set or revise goals for next year.
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