Why do you need a basic budget and what is it anyway? A basic budget allows you to outline your financial goals and hopes. Simply put, it is a money plan for the future - an estimation of monthly income and expenses based on previous bills.
With a budget you can set, and hopefully achieve, your financial objectives by establishing how you will allocate your available funds now and in the future. This allows you to make important financial decisions without being stressed by unplanned emergencies that crop up.
Budgeting allows you to put aside a certain amount of money that will be used for expected as well as unexpected costs.
The initial step in setting up a budget is defining your fixed expenses such as mortgage or rent, car payments, insurance (life, home, auto, health), student loans and so on and getting them down on paper. Expenses that have the same payment amount each month and never differ are called “fixed”. The payments you have to make each month come from your income, no matter what. Without this first step you have no clue where you’ve been, where you are now, or where you will be in the future.
Next, gather up your old checkbooks and write down all your regular, but not fixed, monthly purchases such as groceries, cable, dry cleaning, auto maintenance, gas, utilities, credit cards, eating out, daycare, etc. etc. Then you total up the recurring and the fixed and see what is leftover, if anything, when you deduct this spent amount from your monthly income.
You don’t need any fancy software or computers to do any of this. Plain old pencil and paper will work fine. Remember that this is just a starter exercise to get a general picture of where you are each month.
It's a fairly easy first step. If your monthly income totals $3,000 and the pencil and paper exercise above shows your expenses at $3,600 you are in trouble. Plain and simple. There is no question about it.
Setting up a budget is an effective and fundamental tool that can benefit everyone. Just doing the basics as listed above may shock you into further action or, if you are like the 90% of the “do nothing but moan about it crowd”, you will continue spending your way into debt and bankruptcy.
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