How to Develop a Budget

BUDGETING YOUR MONEY

Do you find that your paycheck is just never enough? Is it becoming harder for you and your loved ones to have any sort of social life because you have no money left once all of your bills and expenses are paid? If you find yourself in this situation, or something similar, you need to re-evaluate your spending habits and better manage your money.

The best way to start regaining control of your finances is to develop a budget. No matter how much money you make and spend, there is always room for change! If you are able to develop realistic spending limits for you and your family, and you keep them, your money will go much further, without having to eliminate everyday amenities.

The first thing you need to do is examine where and how you spend your money. It may or may not come to a surprise to you that a large portion of your hard earned cash is being spent on items and services that are not necessities for survival. For example, suppose you spend $8/day on lunch at work. Multiply $8 x 5 days/week x 52 weeks/year. That's $40/week and $2080/year! You can easily cut down your work related expenses by bringing lunch from home instead of buying. It may not be practical for you to go from buying lunch everyday, to not buying lunch at all. However, even if you bring lunch in 3 or 4 time/week, its a start! Learn more about fixed expenses vs. discretionary expenses.

There are many different motivations for budgeting your money. Detailed below are some of the more common reasons.

Control Credit Debt
Irresponsible money management leads to severe overspending. The end result is you saving less money and developing more debt.

Last year, the average amount of credit card debt for families in America was over $3,000. Credit card interest rates averaged around 18.5%. Therefore, it will cost around $6,000 to pay-off your $3,000 balance with the 18.5% interest when making only the minimum required payments. A good idea would be to use a credit card calculator and determine the length of time it would take for you to pay off your debt and how much money it will wind up costing you.

When developing your budget, try and eliminate your credit card debt as fast as you can. Eliminating this debt will free-up money that was previously being spent on interest; allowing you to save and/or spend your money elsewhere.

Once your credit card debt is eliminated, try and avoid incurring any more debt by not buying on impulse. Using a credit card wisely is difficult, but not impossible.

Cheaper rates for loans and insurance
One of the results of budgeting is structure. Being organized will help you make payments on time, eliminating the chance of having to pay late fees and penalties. Making timely payments will also result in your credit score improving. When you apply for a mortgage, personal loan, auto loan, credit card, etc., the rates and terms you receive are going to be better than if you have bad credit. Good credit will also mean lower rates for auto and homeowner's insurance. Learn more about the effects of having bad credit.

Bettering relationships
Did you know that one of the main reasons for divorce is money problems. When developing a budget, you should include your spouse in the planning process. You need to understand what each other's needs are and how each of you view money and spending. You don't want to develop a strategy that is going to put more constraints on either one of you. You should also discuss what your long and short-term financial goals are.

Financial planning for retirement
Living within your means is one of the best methods for getting ahead financially in life. You should look to save a portion of your monthly budget. Even if its only $50-100/month, its a start. You want to develop an emergency fund for unexpected expenses. Also, putting money aside will help you begin developing savings for retirement.

In conclusion...
The most important result of budgeting is financial security. Not only will you regain financial freedom, managing your money better will teach you how to deal with unanticipated financial issues. Long-term goals will never be achieved if you don't budget! If you have any questions, please contact us.

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