Anyone who desires a brighter financial future must make sure to live in the financial present. This requires the creation of, and adherence to, a budget. This simple yet critical step to financial freedom is often ignored. Many people feel it is overly complicated; or they believe themselves thrifty enough that creating a working budget is unnecessary. The fact is that very few of us do not need improvement with financial planning; most of us would be surprised – even shocked – to see exactly where our money goes.
If you want to create your own budget from scratch, begin by tracking every dollar you spend for at least a month. Credit card and bank card purchases can be monitored easily by looking over your monthly statement, which is usually available online instantly. Make sure to track all of your cash purchases, as well. It is important to know where every dollar goes. Spend a little time categorizing the purchases. You should have at least one category for savings or investments. Pay yourself first!
You can also find preformatted budget templates on financial planning software, like Microsoft Money or Quicken, or on the web. If you go this route, find a budget template with a large number of categories. You can then pare it down to suit your lifestyle and spending habits. The benefit of this is that you may see some categories that you had not thought of. If some categories do not apply to you, simply eliminate them.
Building Your Budget
Open up your favorite spreadsheet program. The top row of your budget will be your monthly income. If your income varies from month to month, use a low estimate, so that you have a cushion.
Under your income, put in each of the categories you created. Each expenditure should be subtracted from your monthly income. Refer to the “Help” button on your spreadsheet program if you are unfamiliar with how to do this – don’t worry, it is very easy. The last line will be the overage or shortage of money for that month.
Optimizing Your Budget
If you end up with a negative number at the bottom of your budget spreadsheet, you are spending more than you are making. Seeing that, you may be tempted to run to the phone to call a financial planner; but that costs money, which you do not have. You can very likely fix your financial problems yourself. Save the money.
Review each spending category and determine where you can make cuts. Create a new column on your spreadsheet. Enter in your goals for next month’s spending – be aggressive, you are striving for financial freedom. Keep adjusting until the bottom number is positive.
The next step is one that cannot be skipped or taken lightly. At the end of that first budgeted month, compare your actual spending to the numbers you set as your goals. Do this with every single category for the first two or three months. By then, you will know which areas need work, and you can focus more on them.
If you can get to the point where there is always a positive number at the bottom line, you will experience the sensation of “budget elation.” Resist the temptation to spend the extra money on a party to celebrate your frugality. Do not buy a self-congratulatory flat screen TV. Feel free to pat yourself on the back, though. The extra money should be saved or invested. Save for a dream vacation or for your kids’ education, without worrying where your next meal will come from. Invest for your retirement or start your own business. Financial freedom will come if you make your money work for you. The world will be your oyster soon enough, as long as you remember:
Pay Yourself First!