While most people think budgeting is about as much fun as dieting, it doesn’t have to be something you dread. By following these simple steps, you can actually have fun in the process!
1. Collect all financial documents
a. Create an income folder.
The income folder contains all sources of income, including: wages paid by an employer, revenue you earn from a part-time or side job, interest income, real estate income, etc.
b. Create an expense folder.
The expense folder includes all bills, such as mortgage statements, utilities, insurance premiums, and automobile expenses, as well as the receipts for groceries, entertainment, dining out, etc.
c. Create a financial statement folder.
The financial statement folder contains bank statements such as checking and savings accounts statements, investment accounts, brokerage statements, retirement account statements, and any other financial statements that you may have.
2. Create an itemized list of all sources of income
Use the income folder to identify the income that you earn each month from each source. If you receive an annual dividend, divide it by twelve to determine your monthly cash income. Other income sources include wages from an employer, as well as income earned from your home-based business, and any other sources of income you receive.
3. Create a list of monthly expenses
Review all of the expenses that you have collected in your expense folder, and create a monthly expense report. If you pay expenses for your automobile insurance on a semi-annual basis, divide that amount by six in order to get a monthly amount. Ideally, separate out need-based expenses from want-based expenses.
Examples of need-based expenses include mortgage or rent payments, car or lease payments, insurance – including auto, medical, vision, disability, life, and long term care insurance, as well as your groceries, and utilities. Want-based expenses include entertainment, dining out, daily coffee, vacations, etc. Everything that you spend money on should be included in your monthly expense report.
4. Combine your monthly income report with your monthly expense report
The goal is to have more income than expenses. The excess can be used to fund retirement plans or personal savings accounts. Ideally, you want to have a balance between retirement and personal savings accounts. If you do not have an emergency reserve of at least six months’ expenses, fund this account first. At least three months’ worth of expenses should be in a cash or savings account, and another three months’ worth in a short-term, low-risk asset.
If you have consumer debt, such as a credit card with a high interest rate, make paying it off a priority.
If you have more expenses than income or are using your credit cards to fund your spending, you must take immediate action to correct this. First, identify where you are overspending. Typically, overspending is a result of want-based expenses. A simple trick is to deposit your total monthly income into a savings account. Then, determine the amount required for need-based expenses and what you can afford for want-based needs. Transfer this amount into your checking account each month. Take the want-based expense amount out of checking in cash, so that you are forced to pay for want-based expenses from your monthly cash allotment. It is amazing how much money you can save when paying with cash – even grocery shopping. By paying with cash (and knowing you have a limited supply) you will pay attention to what you are purchasing. No more buying everything in sight!
Identify all want-based expenses where you are overspending. Eliminate the obvious expenses. For those that are truly a need, consider creating additional sources of revenue. Examples of additional revenue may include a part-time job, a home-based business, affiliate income, and income from network marketing, to name a few.
5. Monthly budget review
It is important that you review your budget at least monthly, including both your cash inflow (income) and cash outflow (expenses), to confirm that you are on track to achieving your cash flow and savings goals. Reviewing your budget on a regular basis ensures that you are staying on track. During your review, take time to assess your actual budget against your planned budget. This provides insight that will help you determine where in your budgeting you are doing well, and where you may need to improve.
6. Enroll accountability partners
In a study to discover why some weight loss programs were so much more effective at keeping weight off than others, a determining factor was the synergy among the members of the support groups, specifically with their accountability partners. The same is true when it comes to money. Enroll not only qualified advisors but also peers. Peers can be ideal accountability partners, especially if they are also committed to creating a financially free life that they love. An effective tool is to pre-determine consequences for achieving or missing your goal. An example of a positive consequence for achieving a goal is a massage on Friday, while missing your goal could mean the negative consequence of making a donation to a political party that you dislike.
7. Make it fun
If budgeting seems like a daunting task, take a minute to re-frame your experience. What if money were simply a game? A game that you loved to play. When we enter with an open mind and stay focused on our long-term goal, amazing things happen. It takes approximately 66 days to change a habit, so what’s the big deal? Just think – in a little over two months, you will be on track to achieving your goal and creating a financially free life that you love!
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