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A starting point in improving financial condition and hence, enhancing your future is to develop a personal financial plan. One of the key elements of a personal financial plan is a financial budget or a spending plan. This spending plan helps you set aside the money for savings, achieve your financial goals and/or accumulate the amount you might want to invest in the future.
Most people refer to the word budget as a miserly spending habit. However, it is not exactly true. A budget, in other words, is actually a plan for spending money in an orderly fashion so as to improve your chances of using your money wisely and not spending more than what you earn. For most people, financial independence can only be achieved by following a set of rules laid down by a budget. Spending wisely is the key to control your money. Yet, more than 90 percent of people do not have a budget in place or do not know how to develop one.
Developing a budget can be divided into a series of steps:
Step 1. Establishing goals.
The first important objective for your financial plan is to set your financial goals. Setting financial goals generally improves the performance of your personal financial plan. A common approach to financial goal setting is to specify amounts of money you would like to earn and save at certain points in time. Financial goals could be yearly, quarterly or any duration that you would feel comfortable with. However, it is recommended to have short-term as well as long-term financial goals.
Decide what you or your family really need. If you are establishing a family budget, it is best to involve the entire family.
Step 2. Estimating income.
Calculate how much you’re bringing in each month from salary, wages, tips, and any other sources of income. People whose entire income is derived from salary can readily estimate their income. However, if you have commissions based incomes, or incomes from investment then you will have to gather all approximate incomes and put them as variable incomes.
Step 3. Estimating expenses.
Gather All Your Bills. Get your utility, credit card, mortgage bills, and whatever else you have to pay each month. Make a category for fixed expenses. After that list your variable spending. From groceries to gas, and from entertainment to clothing, start by allocating funds to each variable spending category. Try to approximate your figures based on how much you’ve spent in the past.
The best way to estimate expenses is to keep close track of what you are actually spending now. After listing all your expenses, perhaps after about a month, try to find some pattern, and if needed then further categorize the expenses into meaningful categories.You can, of course, modify the specific items to suit your particular spending patterns. Always, try to plan for large expenses so that they are spaced at intervals over several years, for example, buying a house, renovating your house or buying a car. Follow up your budget to help you decide whether to continue your current of spending or to make changes. For instance, estimating your expenses might reveal that you are spending far too much on entertainment.
Step 4. Comparing expenses and income.
Sum up the figures in your spending plan and compare with your income for the planning period. If the two figures balance, you are in a neutral financial condition. If your income exceeds your estimate of expenses, you may decide to satisfy more of your immediate needs, or set aside more money for future goals, or put the balance into savings or investment. The true profit from your labour is the difference between your net income and your total expenses. Any household budget has some miscellaneous or unpredictable items each month. After working with your budget for several months, you should be able to make an accurate estimate of miscellaneous expenses. If your income is below your estimated expenses, you will have to embark on a cost-cutting campaign in your household.
Step 5. Carrying out the budget.
After you have done your best job of putting your spending plan on paper or a spreadsheet, try it out for at least a few months. See how close it comes to reality. Keep accurate records to find out where your money is being spent. It is important to make all inputs to your expenditure and particularly useful if it is done at the end of every day so that you do not miss anything.
Step 6. Evaluating the budget.
Compare what you spent with what you planned to spend. If your spending was quite different from your plan, find out why. If the plan did not provide for your needs, it must be revised. If the plan fits your needs but you had trouble sticking to it, then you might have to practice more self-discipline. Each succeeding budget should work better. As circumstances change, your budget will need revision. A budget is a changing, living document that serves as a guide to the proper management of your personal finances.
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