The path to realizing your financial management goals starts with planning. There are hundreds of approaches to planning. However, one of the most important things is that you find one approach and work with it. Here's a four-step model, which might be helpful in getting you started.
Disclaimer: The material provided below in this section should be used for informational purposes only and in no way should be relied upon for financial advice. Also, note that such material is not updated regularly and some of the information may not, therefore, be current. Please be sure to consult your own financial advisor when making decisions regarding your financial management.
Please visit the Practical Money Skills site to learn more about Budgeting.
1. Assess needs.
Decide what you WANT versus what you NEED.
- Evaluate your current financial situation. Take a broad look at the way things are now. You can call this step taking stock, taking inventory, or even taking a step back to see the big picture. Whatever you call this step - don't skip it!
- Make two lists: a WANT list and a NEED list.
As you're deciding what to add to your lists, ask yourself the following questions:
- Why do I want it?
- How would things be different if I had it?
- What other things would change if I had it? (for better or worse)
- Which things are truly important to me?
- Does this match my values?
2. Set goals.
The process of setting goals involves turning your NEEDS into goals. A goal is a very specific result you intend to work toward. You can have both long-term and short-term goals. You can have goals for the day, the week, the year, and for your lifetime.
3. Make a plan.
It is important to begin to develop a plan for your life. Ask yourself, “Where do I want to be five, 10, and 20 years from now?” Once you have this in mind, you can then imagine the actions you need to take to achieve those goals. The more steps you can visualize, the more successful you will be in reaching your goals. The next step is to visualize the order of importance for those steps. What will you do first, second... last?
4. Take action.
The first step to accomplishing your goals is to take action. Many times goals are not reached because the first step was never taken. Having a plan, by itself, doesn't mean you will reach your goals. You must actually do the things listed in your plan. An important part of taking action is affirming your goals. It is important to write them down. In fact, many goal-setting experts will tell you to post them around where you will see them. Say them out loud. Share them with your trusted friends. Seeing them in writing helps them to become a reality.
This chart shows some rough guidelines on how much of your income to allocate toward different household expenses. These are general guidelines and may not reflect how to best allocate your own income. For example, if you live in an area where transportation is higher than normal or rents/mortgage are higher, you may need to make adjustments.
|Percentage of Income||Household Expense|
Steps to a balanced budget
Establishing a budget is the basis of having a good grip on your finances. This easy three-step program can help you create a budget that's unique to your needs.
1. Figure out your income.
To create a budget, start by listing all of your sources of income, including full-time and contract jobs, loans, alimony, and child support for an average month. Be sure to list after-tax figures. Estimate on the low side and don't include income you can't count on.
2. Review past expenses.
Review your checkbook registers, credit card statements, receipts, and bills, and create a list of your expenses for an average month.
Start with fixed expenses, such as your rent or mortgage, where the payment amount is the same each month. You may want to include periodic expenses (those that are paid less often, such as life insurance payments or car registration fees) by dividing them into monthly costs.
Next, figure in variable expenses such as phone or utility bills, transportation, groceries, eating out, clothing, childcare, home care, and entertainment. These expenses may change from month-to-month. Find the average and remember to include a figure for that pocket cash that seems to just “disappear.”
Now, add the fixed and variable expenses to calculate your total monthly expenditures.
3. Do the math.
Subtracting your total expenses from your income will give you your budget starting point.
If the sum is below zero, it's time to trim your variable expenses. With a little creativity, you can usually cut entertainment or other expenses without really noticing.
And don't forget: you should considering setting aside a portion of your net income for savings. That way you'll be prepared for extra costs like an unplanned auto repair or a future vacation.