Create a Budget in 10 Steps

The first step towards financial security is is developing your budget. That is an in depth and complete overview of your money and expenses. Developing a budget can seem like an overwhelming task, but I've broken it down into 10 relatively easy steps that will get you on the road to financial security.

1. Take the Leap and Make the Budget

The first thing you must do is to realize the necessity of a monthly budget, and then decide to actually follow through on making one. Sometimes, the first step is the hardest, but stick with it and know that it will be worth.

2. Determine How Much Money You Currently Have

For this step you need to check ALL of your accounts for balances, fees, and interest. This includes checking accounts, savings accounts, any investment accounts such as 401Ks or retirement plans.

3. Determine Your Monthly Income

Salaried employees have it easy here, as you are making the same amount every month. Be careful to not include any bonuses or additional amounts that are not guaranteed month to month. You only want to included your guaranteed monthly income for your budget. Hourly employees, your paycheck may vary from month to month making it more difficult to determine your monthly net income. In this case, your best bet is to take an average of your paychecks for the last 12 months. This should give you a good idea of approximately how much you can plan on month to month. Be sure to only calculate your take home pay after taxes, insurances, etc to get a realistic monthly income.

4. Determine Your Debt

This process is one of the more daunting steps, but don't get discouraged! For this step you only want to calculate your actual debt and the recurring monthly payments, i.e. car loans, mortgage payments, and student loans. If you have credit card debt, you would also need to include that here.

5. Calculate You Net Worth

You have already determined how much money you have and how much money you owe. To determine your net worth just subtract your debt from how much you have. Don't get discouraged if you have a negative net worth. A negative net worth is not uncommon, and another great reason to develop a budget.

6. Explore your Monthly Expenses

In this section you need to determine how much you spend on a monthly basis on expenses (not debt as in section 4.) This includes things like utility bills, groceries, clothes, eating out, gas, car insurance, etc. These amounts are slightly more difficult to calculate exactly as some change from month to month. Again take the average of these expenses based on the last 12 months.

7. Input your Information

You have your monthly income and expenses calculated, now it's time to turn that information into a budget. There are several online programs available for this. Spreadsheet programs, such as Microsoft Office, are also great options. If you are not comfortable using these types of programs, a pencil and paper will also do the trick.

8. Behold the Bottom Line

Now that you have your budget calculated, you have the most important figure in this process, the bottom line. The bottom line is the amount of money left over at the end of each month after the disbursement of your essential expenses. From here, you are able to determine your level of flexibility in your budget.

9. Make the Necessary Adjustments to Your budget

Don't panic if your bottom line is less than you expected (or hoped) it would be, now is a perfect time to re-evaluate some of those expenses. You may want to shop around for car insurance, start clipping grocery coupons, cut down on eating out or purchasing new clothes until you get that bottom line to a more acceptable number. On the other hand, you may be pleasantly surprised with your bottom line. If you find yourself with a surplus of funds at the end of the month, now may be a great time to ramp up that savings account or apply extra money to start chipping away at your debt to increase that net worth amount.

10. Stick To It

The only way your budget will work for you is if you actually use it. Sticking with a budget can be tough, especially if money is tight. Just remember financial security is certainly worth more in the long run than that daily coffee at the swanky cafe.

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