Saving money can open the doors to financial freedom, and creating a budget makes saving that much easier. A budget gives you insight into your financial situation — where your money is coming from, where it is going, what your net worth is and where you can cut your expenses. Without a budget, your journey to financial independence will be like walking in the dark without a clear idea of where you are headed.
Here is a step-by-step guide to help you create your first budget.
1. List All of Your Income
When creating a budget, it is important to know where your money is coming from. So create a list of all your sources of income. If your job is the only source of income, put down your monthly salary. If you are self-employed, add your income from the past year and divide it by 12 to get an estimate of your monthly income.
If you have any other irregular income, such as bonuses, dividends, commissions, royalties or rental income, include them in the list as well. If these are received quarterly or annually, divide by 3 or 12 to get the average monthly figure.
2. List All of Your Expenses
The purpose of your budget is to track where your money is going so that you can control your expenses. Make a list of all the necessary monthly expenses. It should include all the bills that you pay every month, such as rent, mortgage, utilities, groceries, car insurance, credit cards, loans, etc.
Create a list of all your discretionary (irregular) expenses as well, such as vacations, movies and eating out at restaurants. To make it easy, you can make a rough estimate of such expenses in the past year and divide the total by 12.
3. Determine Your Net Worth
Once you know how much money you have, as well as any assets such as a car or a home, you then need to figure out what your liabilities (car loan, credit card debt, etc.) are. Subtracting your assets minus your liabilities will give you your net worth. This number will give you a clear picture of where you stand financially.
4. Find Out Where You Can Reduce Your Expenses
Now that you know your net worth and where your money is going, this makes it quite easy to find ways where you can reduce your expenses to increase your savings. Think of all the areas where you may be overspending or spending unnecessarily. For example, you can try cooking more at home (here's how one woman cut $600 of food costs out of her budget) rather than eating out most nights.
5. Use a Spreadsheet
To make budgeting easier, you can enter this information in Microsoft Excel or any other spreadsheet you may have. You can also use an online budgeting tool if you like.
Make separate tables for your income and expenses and insert the formula to compute the total at the bottom of each table. If your goal is to control your expenses to increase your savings, place a "goal" column next to the actual expenses column, so that you can compute the differences between your intended and actual expenses. Then you just have to make the necessary adjustments to meet your goal until it meets all your criteria.
Ideally you should aim to save at least 10 percent of your monthly income. Warren Buffet says, "Do not save what is left after spending, but spend what is left after saving." You could take it a step further and save automatically with the help of tools and apps like these, because automating your savings is a great way to build up your savings without thinking about it.
Finally, there may be a way to save more money over time if you can get a better interest rate on any of the various forms of credit you use. By monitoring your credit and creating a plan to build your credit (which you can do using free tools on Credit.com), you can work toward having good or excellent credit. A higher credit score can get you access to lower interest rates, which can save you thousands — or even tens of thousands — of dollars over the life of your car loan or mortgage. Those kind of savings can make a huge difference over the years.
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