Budgets don't work. The psychology behind your spending and saving is what needs to be examined.
Set your goals
The first step in setting up a budget is to identify and set up your goals. You goal may be to pay a debt, to buy a house, to prepare for retirement age, to minimize the debt you graduate with, to save for car or your family. Budget may involve difficult choices but having a specific goal will simplify it.
Every financial goal you set should be a SMART goal:
S = Specific
A = Achievable
R = Relevant
T = Timely
Your goals can be classified into three categories:
- Short-term goal: Less than a year
- Mid-term goal : one to three years
- Long-term goal: More than five years
For example, lets assume that you want to buy a car immediately you graduate from school and you have 36 months to spend in school. You have to start saving for each month now. If the cost of the car is going to be $3,000 in three years, how much do you need to save per month in order to meet up with the cost? Rate of return is assumed to be 2% per month. Annuity or Sinking fund can be used to solve this problem.
Know your net income
The first step in creating a budget is to identify the money you have coming in, otherwise known as your income. Keep in mind, however, that it's easy to overestimate what you can afford if you think of your total salary as what you have to spend.
Make your plan
Start by dividing your net income into 2 broad spending categories: fixed expenses and variable expenses. Some of your expenses, such as your mortgage, are fixed because they stay the same each month. Other expenses, such as entertainment or gas for your car, are variables that change from month to month. For both fixed and variable expenses, you'll want to record how much you spend on each.
Creating a budget
Follow these 4 easy steps as you start building your personal budget spreadsheet:
- Record your daily spending with anything that's handy, whether it's with a pen and paper or an app on your smartphone.
- Plan for next month's expenses and income so you don't get taken by surprise. Make sure to check in with your significant other before making the list final.
- Look for ways to spend less. Small savings can add up to a lot of money. Adding one small saving at a time to your budget can surprise you with how much extra money you've accumulated. For example, try shopping at a cheaper grocery store, buying generic brands or experimenting with cooking at home.
- Find ways to boost your income. Have a hobby or a talent? Anything from handy work to writing or teaching an instrument can be a way to earn extra money. One big bonus about this strategy is that you can make your side business full-time if you ever lose your job.
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