Monday, December 6, 2010

How to Make A Budget ( Part 2 )

Now you know why having a budget is so important. It can help you:

Make long- and short-term projections about your financial situation. 
Avert a financial crisis. 
Get the most from your money. 
Plan for major financial changes.
Achieve peace of mind.

First, let's discuss the various systems you could use to track your money:

Notebook and Pen:
This is the last expensive budgeting tool that you can get. However this also can be misplaced easily and it's hard to track the flow of your money.

If you have a computer, chances are it came with Microsoft Excel. If it didn't, you can download Open Office to get a free spreadsheet program that's compatible with Excel. If you use a spreadsheet to track your income and expenses, you're less likely to make mistakes, and you can easily do calculations like how much you spent on groceries for the entire year. In addition, a spreadsheet can keep a running total of how much money you have left to spend in a particular month that adjusts every time you enter a new expense into your spreadsheet.

Financial Software such as Quicken and Microsoft Money:
The obvious drawback of these programs is that they cost money and may have to be upgraded (for a fee) every couple of years, particularly if you get a new computer with a new operating system. However, they can do much more than a spreadsheet. They keep track of your bank and investment accounts for you, for example, sparing you from logging into all those accounts. The down side is that if your computer gets stolen or hacked, you might wish so much of your personal information wasn't so readily available.

Simple Steps To Using Your Budget Once you've chosen the system that's best for you, how do you start using it?

1. Keep Track of Every Expense.
Track any expense that you are making on a daily basis including small expenses like buying a soda, candy, etc

2. Update Your Budget - Daily!
Tracking your money this way will take minimal time, and you'll be less likely to forget something.

3. Use Accurate Descriptions
Write down your expenses by what they are rather than where you purchased them so you'll be able to figure out later how much you spend in particular categories

4. Budget by the Month, Not the Paycheck
This forces you to think slightly longer-term than your bimonthly paycheck, but not so long-term that you're likely to get derailed. Also, you'll get a fresh start every month. If you have a bad month, it's in the past after 30 days. If you have high expenses one month, you can look forward to the following month when, for example, your car insurance isn't due.

5. Plan for Both Fixed and Variable Expenses
Fixed expenses are items like rent and life insurance, and variable expenses are things like utilities and gas. Some costs, like groceries, can fall into either category depending on how much self-control you have.

6. Plan for Occasional Expenses
Budget for expenses that only happen a few times a year like gifts, car insurance and doctor visits. If you have enough room in your budget, you can pay for these as they occur. If you're on a tighter budget, set aside additional savings ahead of time. There is no excuse for going into debt because you didn't realize that Christmas happens every year or that you would need a bridesmaid dress or a tux when your best friend gets married a year from now.

Your budget can be more or less detailed depending on your level of self-control. Can entertainment be grouped under miscellaneous, or do you tend to spend so much on movies, restaurants and concerts that this needs to be its own category?

In addition, budgeting is a little different if you have a steady income versus an irregular one. If you're paid hourly or on commission, are self-employed, work seasonally or are a student, you probably won't know how much you're going to make until the month is over. Irregular pay makes budgeting a little trickier, but it's still feasible. You will still have to cover certain expenses no matter what, and if you've been in the same line of work for awhile, you probably have a good idea of the minimum amount of money you're likely to make. Budget around that minimum and you might be pleasantly surprised at the end of the month if you make more.

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