Efficient financial management serves to maximize your current assets today, while earning additional growth for the future.  It can help eliminate debt, pay back loans, pay for tuition, and much more. This article discusses one of the most important aspects of financial management – budgeting – and provides helpful tips for staying on track while avoiding debt.

The purpose of a budget is to establish where your money is coming from, how much is there, and where it’s going.  Following these steps will help you create a successful budget.

Steps for Creating a Budget

1.       Set a goal – The first step when creating any budget is to have a goal.  A common goal includes saving money so that you can make a purchase while avoiding debt.  If this is the goal of your budget, write it down before creating your budget.  Simply put it should look something like this:

I need $X to pay for Y.

This is the goal of your budget. “Y” can range from a new pair of shoes to college tuition while “X” is the amount of money you need to save in order to make the payment. Be sure to update your goals when appropriate.

2.      Record all sources of income – Usually, this is one paycheck every two weeks.  However, if you are self employed, or have outside sources of income, be sure to include these as well.  Record all sources of monthly income as “Incoming” amounts.

3.      Record all expenses – Create a list of all anticipated monthly expenses, beginning with the necessities.  This includes groceries, bills (electric, water, etc), tuition, insurance, automotive maintenance and payments (including gas), rent, and whatever else you need to pay for over the course of the next month.  Record all expenses as “Outgoing” amounts. 

In this step, be sure to be as accurate and inclusive as possible.  In order to successfully budget your money, you must understand what your expenses are. So begin by tracking your spending.  Over the course of this month, watch closely where and when you spend your money. Record each expense, from a stop at the gas station to a trip to the grocery store. Write these expenses down with a notebook and pen or record them on a computer spreadsheet. Once you realize your expenses you can create a more dependable budget, and thus, will have more success in managing your wealth.

4.      Break up expenses – Break up your expenses between fixed and variable.  Your fixed expenses are those not likely to fluctuate (i.e. rent) whereas your variable expenses (i.e. groceries and gas) may vary each month.  To compensate for variable expenses allow for 10% more than you would anticipate paying.  For example, if you expect to pay $60 dollars on groceries, set aside $66.   

For this step a balance sheet can be very useful for staying on track.  Basically, it calculates your net worth by comparing your financial assets (what you own) with your financial liabilities (what you owe). The difference between the two is your personal net worth. Don’t be discouraged if your net worth is negative—keep in mind that this should be an accurate depiction of your financial situation. Setting goals is much easier once you know what your current net worth is.

Tips for Successful Budgeting

The key to creating a successful budget – and sticking to it – is learning to live below your financial means.  In other words, spend less than you earn and save a fixed amount of your earnings each month.  For example, if your salary is $30,000/yr, consider living off of $25,000 and setting aside $5,000 for paying off loans or for saving and investing.  Remember, it is better to forego a purchase until you can pay for it in cash rather than borrowing from the future.  By purchasing goods before you have the money you are in effect buying goods before you have the money.  Here are some more tips to keep in mind:

•  Think twice before you spend

o   Don’t spend money just because you have it, any extra money should be put into your savings.

•  Spend less than you earn

•  Track your spending

o   Monitor your bank statements and daily expenditures.

•  Rationalize your spending

o   Purchase what you need before purchasing what you want.

•  Saving money means earning money

o   The old saying “A penny saved is a penny earned” is far more than a simple euphemism.  Consider this example.  If you saved $2 everyday at an interest rate of %10, you would have over $5,000 in 5 years and $50,000 in 20 years.

For more information on budgeting and financial management check out these websites:

http://www.moneymanagement.org/

http://www.free-financial-advice.net/