If you want to get a hold of your finances, you need to control your spending—and that starts with establishing a budget. Learn how to create a budget, best practices for sticking to it, the latest budgeting software available to you, and more.
An individual’s budget will vary depending on their lifestyle, spending habits, and net income. To start a budget, you need to take a deep dive into how you spend your money, which includes gathering all of your bills and pay stubs. When you have all of your bills and pay stubs, write down all monthly expenses. Then, write down your monthly income. Subtract the expenses from how much money you make. If the number is less than zero, you are spending more money than you make, and it is time to reevaluate your spending and saving habits. A beginner can use a budgeting spreadsheet, calculator, or various applications to assist in the process.
A personal or household budget is a financial summary that compares and tracks your income and expenses for a defined period, typically one month at a time. Essentially, it is a written plan for how you will spend your money. It allows you to make financial decisions ahead of time, making it easier to cover all your expenses. It also helps you to pay off debt, save for the future, and be able to afford fun expenses. Budgeting consistently can help you turn your finances around and start the process of building wealth.
How much spending money you should have each month depends on the individual. However, to determine this amount, you need to get a sense of how much you are spending per month compared to what you earn. This way, you can set spending limits. The first step is to take a look at mandatory expenses, then add them all up and subtract the total from your income. The amount you have left is what you can budget for discretionary expenses and savings goals. There are many different budgeting strategies you can follow to determine how much you spend each month. Generally, what you budget for expenses should not be more than your income; otherwise, you will end up in debt.
Each month, you’ll likely spend in three categories of expenses: fixed, variable, and discretionary. Fixed expenses are necessary ongoing costs that don't change in amount or frequency. Some examples include rent, health insurance, or a phone plan. Variable expenses are still considered necessary costs, but the amount you spend changes every month. The amount you spend on groceries or clothing each month can be considered variable expenses. Lastly, discretionary expenses are those expenses that you desire and would like to have but do not necessarily need, such as a dinner out at a restaurant or concert tickets.
The 50/30/20 rule of thumb is a way to allocate your budget according to three categories: needs, wants, and financial goals. Through this strategy, 50% of your budget will go toward needs, 30% will go toward wants, and 20% will be put away for financial goals. All of the categories use your after-tax income.
While you can make a budget by hand or by using one of the many applications or software available, a spreadsheet is one of the most effective ways to create a budget. To make a spreadsheet, you must first download a software program, such as Microsoft Excel. Then you’ll need a list of fixed monthly expenses, variable monthly expenses, and income records for everything you earn. Next, decide how you wish to organize your spreadsheet, whether that be by including all information in one sheet or creating several tabs within the sheet. Then, track your income sources, as well as your expenses. Compare the two, and continue to track your spending and saving habits within the sheet. There are also several pre-made sheets available online if you do not wish to start from scratch.
An emergency fund is money that you have set aside to cover any financial emergencies or unexpected expenses that may come up. Those can include anything that you haven't planned for, such as unexpected car repairs, medical bills, unemployment or other income loss, property damage, or family emergencies.
Collateral represents something you own, of value, that you offer to a lender as security in return for a loan. If you fail to pay the loan, the lender can legally claim your collateral as part of its effort to recover at least some of the amount you borrowed.
Liens give a person or company a right to somebody else’s property. You rarely notice them when things are going well because they help with home loans, auto loans, and other parts of your life. But when things go badly, liens can make your life difficult—or help you protect your interests.
A zero-based budget is a budgeting strategy in which you assign every dollar of your income a job. By the end of the month, after you account for all of your expenses, savings, and spending, you should have no money left.
A debt elimination plan gives you a good grasp of your finances while setting actionable repayment targets. Although paying off your debt won’t happen overnight, a good repayment plan can help you stay both motivated and committed to improving your finances.
Your net worth is essentially a grand total of all your assets minus your liabilities. In other words, your net worth is the figure you get when you add up everything you own, from the value of your home to the cash in your bank account, and then subtract from that the value of all of your debts which may include a mortgage, car or student loans, or even credit card balances.
In general, assets are anything you own that has a value. Financial assets specifically are any assets that derive their value from a contract or other claim. Although there can be a physical form of financial assets, most financial assets are not physical.
Net income is the money that you actually have available to spend. It is equal to your total income minus tax payments and pretax contributions.
Fixed expenses cost the same amount each month. These bills cannot easily be changed and are usually paid on a regular basis, such as weekly, monthly, quarterly, or from year to year.
Compound interest is interest earned from the original principal plus accumulated interest. Not only are you earning interest on your beginning deposit, but you're also earning interest on the interest.
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