How to Create an Effective Budget

Many finance newbies are surprised to learn that in as little as thirty minutes they can create an effective budget and allow it to become an important financial tool.

  • Gather all of your financial statements

    These financial statements include any fixed expenses and variable expenses that occur each month as well as statements of income. The statements of income may include investments, payroll stubs or other accounts which are accruing interest each month.

    Fixed expenses could include a mortgage and property taxes payments as well the utility bills. Ensure that this information is organized and easily attainable to begin the budgeting process.

  • Create a List of Your Income and Your Expenses

    Creating this list of your income and your expenses allows you to determine whether you are living within your means. Your expenses should be less than your income, otherwise you are living above your means and using sources of credit every single month to cover the shortfalls within the income.

    It is important to record all sources of income, whether they are regular or month to month as well as all expenses. No expenses are too small to add to this list – record everything that you spend money on at this step.

    It can be helpful to keep receipts for one to two months before attempting to create a budget to gauge the items which money is spent on.

    Be sure to add savings to the budget – if you have not already established a savings account. You should save at least ten percent of the income from all sources, which can be deposited into a high interest savings account. This will yield the highest result through the term of the deposit. As well as expenses, debt repayment calculations should be made within this category.

    If you are facing high levels of debt, it is important to remember that no more than fifteen percent of the income should be allocated towards debt repayment as this can bring stress to other components of the budget.

  • Determine Your Fixed and Variable Expenses

    There is one large difference between fixed and variable expenses. Fixed expenses are the expenses that do not change from month to month. These expenses are unable to be tweaked within the budget. Variable expenses are those that indeed change from a month to month basis – and this is an area where most people are able to cut their expenses by up to fifty percent. Most people are overspending in this category which can lead a deficit between the income and expenses.

  • Are Your Expenses in Line With your Income?

    Many times, if you are living above your means than the expenses will not coincide with the income. In cases such as this it is important to tweak the budget to ensure that all of the needs are being met. Variable expenses, fixed expenses, savings and debt repayment are four main parts of the budget. Be sure that you are contributing to each part to create a successful budget.

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