Monday, December 6, 2010

How to Make A Budget ( Part 3 )

To plan for the short- and long-term, you'll need to have a rudimentary understanding of your finances.

Know Your After-Tax Monthly Income

Everyone knows his/her hourly wage or monthly salary, but not many people can tell you how much they take home after taxes. It's important to know this number because taxes significantly reduce your paycheck.

The easiest way to find out how much you really make is to look at your last pay stub.

Ensure That Necessities Fall Within After-Tax Income

Once you know how much you really make each month, start by listing all of your necessary expenses, like rent and utilities, and making sure their total cost is less than your take-home pay. If it isn't, can you cut back somehow? Housing expenses take up the largest chunk of most people's budgets, so that's the best place to think about reducing your expenses if you're having trouble making ends meet. If you can't reduce the cost of your necessities, it's time to figure out how to get a higher-paying job, which may involve a longer-term strategy like obtaining a vocational or college degree.

If you can, consider savings as one of your necessities. This will make you more likely to save because you'll think of it as a necessary "expense" rather than an optional one. As I always say, "pay yourself now!." This will help keep you from running up your credit when the unexpected occurs, and it can help you achieve your life goals faster.

Some Required Expenses Don't Occur Monthly

Costs like life insurance and visits to the doctor may not be monthly charges for you, but rather expenses you pay only once or twice a year. Nonetheless, you have to pay them, so don't forget to factor them into your necessities. One way to do this is to make a list of all your expenses that only occur a few times a year, add up their total cost, divide it by 12, and add the result to your required monthly savings. This will ensure that you have enough cash on hand to pay these bills when they are due.

Check Your Breathing Room

Hopefully, you still have some money left over after meeting your basic necessities. Make sure you know what this amount is so you won't exceed it.

Some Discretionary Expenses Also Aren't Monthly Costs

Expenses like gym memberships, vacations and gifts are not actually required expenses and they may not be the same price each month. So, if you want to be able to afford them, you should again make a list of all these optional expenses that only occur a few times a year, add up their total cost, divide that sum by 12 and add the result to your optional monthly savings. This way, you won't be tempted to go into debt or have to skip out on these items.

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