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Chapter 4: Build a Budget

A budget is simply a plan for what you want to do with your money. It sets restrictions on spending, but it does not have to be oppressive. And by sticking to it, you will have the money for the things that are important to you, whether it be saving for a child’s college education or taking a nice vacation once a year. Though everybody’s budget is different, there is one consistent rule: expenses should never exceed income.

List and total your monthly net income
To start creating a budget, list your and your spouse’s (if applicable) net (after-tax) income from all sources. If you receive seasonal or periodic income, calculate what you receive per year and divide by 12. If you are uncertain about any figures, be conservative with your estimate. It’s better to have money left over than be caught without enough to pay your bills.

List and total your current monthly expenses
There are two columns in the Budget worksheet – Current and Proposed. In the Current column, list your monthly expenses as they are now. Use the figures from your tracking forms or budgeting software to help you with accuracy. Remember to list debt payments and savings contributions. Also don’t forget about expenses that come up once in a while (called periodic expenses), such as gifts, trips, and vehicle maintenance costs. To calculate what you spend per month, total what you spend per year and divide by 12. Even though you may only have many of these expenses once or twice a year, you can set aside money every month so that they are easier to pay when they do occur.

Subtract your current expenses from your current income
Total your current expenses and subtract the sum from your current income. If on paper you have money left over, but in reality you are living close to the edge or falling behind, then you have not accounted for everything or some of your figures are wrong. Take some time to examine your budget for inaccuracies and make corrections. You may want to track your expenses for another month or two and fill out the worksheet again.

Identify where you want to make budgetary changes
If you are spending more than you earning, you will need to make changes. Are there any ways you can increase your income (e.g., get a part-time job, rent out a room in your house, work overtime)? Are there any expenses that can be reduced, postponed, or eliminated? Be honest about what is a necessity and what isn’t. (Eating out for lunch everyday or having cable television is nice, but you don’t need them to live.) List any changes you plan on making in the Proposed column of the worksheet.

Even if you currently spending less than you are earning, if you are not saving as much as you want to (remember the figures from the Financial Goals Chart), it is a good idea to consider what ways you can increase your income and/or reduce your expenses to free up cash. You may also want to make changes if you have credit card debt or unsecured personal loans so that you can increase your payments. The higher your monthly payments, the less interest you have to pay and sooner you will be debt free.

Beat the budget busters
Sticking to a budget can sometimes be a challenge. Use these tools and techniques to help you stay the course:

  • Avoid those stores, malls, and online retailers where you know you have a hard time controlling your spending.

  • Make a list of what you need before shopping, and buy only what’s on it.

  • Occasionally reward your efforts with an affordable reward.

  • If you’re on the verge of splurging, seek the support of a friend who knows what you are trying to accomplish.

  • Avoid excessive use of credit. Since you don’t have to pay the bill right away, it is easy to overspend when you use a credit card. Only charge purchases when you can afford to repay the balance in full by the due date.

  • For every potential purchase, question whether it is a want (nonessential) or a need (essential). Recognizing the difference between the two can help you avoid unnecessary spending and impulse shopping.

  • Remember your goals. By sacrificing the things you don’t really need today, you can attain more meaningful financial objectives in the future.
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