Five Steps to Building a Budget

Putting money in a piggy bank.

I know, everyone's heard the same advice over the years. Budgets are like road maps: If you plan your route to financial success, you'll get there faster and with a lot less arguing over wrong turns. Well, I'm here to tell you that it's absolutely true.

Spending a little time creating your budget can save you big money, simply by identifying where the money's going and where it needs to go (because they're not always the same direction). Here's how to get started, in five easy steps:

Step One: Track your spending

Write down everything that you spend for a month. Sure, it's going to feel like a pain. But carry a notebook with you, create as many categories as you need for your different expenses, and jot them all down -- from the parking meter coins to the rent or mortgage payments.

Step Two: Add it up

Now tally the results. If you're like most people, you'll be shocked at the difference between what you think you spend and what you actually do spend. Maybe it's the daily lunches or the lattes -- but at least you now know where the money's going.

Step Three: Sort it out

Separate each category of your expenses into fixed (the ones that have little or no flexibility, such as mortgage/rent, loan payments, utilities, insurance payments, etc.) and variable (the ones that you have more control over, including groceries, clothing and entertainment). Multiply them by 12, to provide annual spending figures. Also include the expenses that might come just once or twice a year, such as vehicle registration or school fees.

Step Four: Find your balance

You've created an excellent record of your spending. Now you need to compare it to your income: paychecks, investment earnings, child-support. List all of the money that's coming in every month, and multiply it by 12 to obtain your annual income. Now, how does your spending compare to your income?

Step Five: Plan

Here's where you put it all together. Money in, money out, and your goals, whether they're paying down your debt, saving for vacations or planning for college or retirement. Put a dollar figure on those goals. For example, how much do you want to pay down your debt each year? Most important, does your current income and spending allow room for meeting those goals?

If the answer is no, don't panic. Simply look at ways to either increase your income or decrease your expenses (or both). Juggling the expenses in particular (deciding to brown-bag it to work four days out of five, for example) can create enough wiggle room to help you achieve your goals.

Secret Budget Tips

Tip #1: The only people your budget has to work for are the members of YOUR family -- which means that involving all of your family members in the budget process, in an age-appropriate way, is an excellent way to boost the budget's success.

Tip #2: Don't try to do your entire budget all at once. Take a few days, or even weeks if you need to. Break the work down into manageable pieces.

Tip #3: Start your own 'rewards' program with your savings. If you save $10 a week by not buying lottery tickets, for example, celebrate your budgetary success by going out to a movie once a month -- you'll be spending part of it on yourself, which is a great incentive to continue saving, but you'll still have money left over to put towards savings or other goals.

Tip #4: Even your fixed payments may have some flexibility. Think about refinancing your home to reduce your mortgage payment or extend the amortization period. Or, consider lowering your debt payments by obtaining a consolidation loan.

Stanley J. Kershman is the author of Put Your Debt on a Diet: A Step-by-Step Guide to Financial Fitness (Pepper Pike Press), a practical handbook that walks you through the process of improving your money management skills.


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