This post is part of our celebration of Financial Literacy Month this April. It was written by Lisa Chiovaro, Financial Consultant at CooperKatz.
I first encountered the concept of a budget when I was very young. When I received my allowance, my father used to teach me about the “envelopes.” It was his old-fashioned way of keeping his money sorted as he “budgeted” for the bills that were to come every month. He had an envelope for every household expense, one for the rent, food, the church donation, etc. He would take his salary every week and put a portion into each envelope. By the end of the month, he would deposit all the money and have enough to pay the bills due at the beginning of every month. It was a simplified, yet effective approach to establishing a routine and managing money.
Yet when people hear the term “budget” they probably automatically think it only pertains to business. It makes sense, in order to operate a successful business, the fundamental development of a budget is a necessity. Most business owners set out with a plan and create a budget to build a financially sound operation with positive cash flow. The goal is to create a revenue stream that is greater than the expenses. The result is the net profit and a sustainable business model that can grow exponentially from the foundation of smart financial decisions.
If only we could all apply that method to our personal finances. Whether you are single and living on your own or married with a house full of children, maintaining a household and living a desired lifestyle is very much like running a thriving business. If you don’t spot check your spending habits regularly, you could be forming a habit that is very hard to break – spending more than you are making.
Creating a budget from scratch may seem challenging at first but in reality there is never perfect time to start, especially if you are living paycheck to paycheck. Spring is in the air and maybe some extra money is too. If you received a tax refund and are contemplating what to spend it on, it may be the perfect opportunity to jump start your savings account and create a budget.
Here are a few simple steps to get your personal budget up and running:
Step 1: Make a plan - If you never created a budget before, start small. Three months is a great starting point.
Step 2: Calculate your income - Consider only your take home pay, not your annual salary. Your after-tax income is your available cash on hand.
Step 3: Determine your fixed expenses - These are expenses that do not vary greatly each month (e.g., rent, utilities, car payments, insurance, mortgage)
Step 4: Identify existing debt - (e.g., credit card payments, student loans).
Step 5: Analyze your discretionary spending - Eat out a lot? Buy coffee every day? Your splurges may be where all your extra money is going!
Step 6: Force savings - Do you desire to travel? Eyeing those shoes that never go on sale? Are you ready to buy your first house? Are you having a baby? Create a line item on your budget and if you are diligent, achieving that goal may be closer than you think.
Once you are able to identify your income and evaluate your expenses, you are at the final step to achieving the balance of a budget and creating a sound financial plan for your future.
Although I no longer keep envelopes stashed with money and my budgets now reside on spreadsheets, I often think back to the simple concept of not only saving for a rainy day, but the overall gratifying feeling of accomplishing positive cash flow.
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