Budget – How to Build One?

Are you living on your credit cards? Do you find that your bank balance drops into double digits in the days before payday arrives? Being on the financial edge means that you are unable to save for dreams like homeownership and waste money every month paying interest on consumer debt. Most people don’t wind up in debt because of a single large purchase; it’s small ones that add up. By carefully managing what comes in and goes out, you can take control and fix your financial health.

Start with a List of Your Expenses

Add up predictable expenses like rent, electric, phone, internet and water. To find out what you typically spend in other, more flexible, categories, take a look at your credit card and bank statements. You may have to eyeball an average on expenses that fluctuate from month to month. Be sure to add a line for savings.

Take Income Into Account

Add up your and your partner’s salaries, as well as any money from investments or side jobs like eBaying or freelancing. If your income is unpredictable, look at your total earnings from last year and divide by 12 to get an average.

Where Can You Cut Back?

Many people find that, when they subtract their expenses from their earnings, they wind up with a very thin margin or even a shortfall. While few of us are in a position to consistently raise our incomes, we can all find places where we can cut back. Can you cancel a membership that you do not use? Cut back to a less expensive cell phone plan? Cancel cable TV and get by on Netflix instead? By playing with the numbers, you can often save hundreds of dollars a year and give yourself much-needed breathing room.

Also scrutinize non-necessity spending. If you eat out once a week, cut down to once every two weeks or even once a month. Watch movies at a second run theater instead of on opening night. Buy an espresso maker to brew premium coffee at home and break your Starbucks habit.

The Discipline to Stay On Track

There are a number of ways to keep yourself within your budget. Some people swear by the envelope system, where they withdraw cash from the bank and divvy it up into different categories. If you prefer using plastic over paper, you can also establish checking accounts for each type of expense.

Still others keep within their budgets by carefully tracking spending. This can be as simple as a paper notebook where you record every penny spent. There are also online budgeting tools offered by many banks or through independent services like Mint.com.

When you carefully adhere to a budget, you become more mindful of your spending. Over time, thinking purchases through becomes second nature, allowing you to live well within your means.