Setting Up a Budget

Are you currently trying to find your way out of debt? Perhaps you've recently turned over a new credit leaf, and want to make the most of your money so you never find yourself in debt again.

Whatever your reason, if you are looking to set up a budget, you should know that it's more than taking five minutes with pen and paper. After all, a budget doesn't mean much unless you use it to change your life. A good budget needs to be properly planned and then executed with precision. If you are looking for a good formula for your budget, you've come to the right place. If you're serious about getting your finances in order, begin by follow our step by step plan below.

Categorize Your Expenses

The first thing you should do is pull out your bank statements and credit card statements for the past twelve months. Using these statements as a guide, go through and categorize each expense. For example, you will probably have categories for rent, gas, school expenses, electric, water, cable, telephone, clothes, and haircuts. However, every person's categories will be different, so don't try and fit yours into a prefabricated budget plan.

Now, create totals for each category so you'll know what to plan for each month. You'll need to estimate the amounts for some things. For example, your rent or mortgage should be consistent, but your electric bill may vary. In this case, add the total amount that you paid for the year, and then divide by twelve. The same is true for some categories such as gifts and car insurance (if you pay insurance quarterly or twice a year). You can't count on what you spent each month, so you will need to total the amount in each category and divide each by twelve as well.

How to Deal with Cash Expenses

Next, you'll need to add up all of your cash expenses. You probably won't have a good idea where most of this money went, which is why you should create a balance sheet right now. Promise yourself that you will log every cent in cash that you spend, noting exactly where it went and what it was for. Every time you use your ATM card to take out money, you'll need to log it. Whenever you cash a check, do the same. If you make a deposit, but take out some of the money, be sure to put it in your cash category.

TIP: By using a debit card or a credit card which you will pay off each month, it is easier to keep track of expenses as they will show up on your statements and most companies are required to give you a receipt if you use a credit or debit card.

Determine Your Monthly Income

Now that you understand how much money is going out every month, you'll need to figure out how much you've got coming in. The most obvious is your paycheck, but don't forget to figure in items such as royalties, interest on investments, bonuses, and gifts. If your paycheck is based on commission, or is not consistent for some other reason, use the same trick when determining the monthly cost of inconsistent expenses. Total up your last 12 months of income and divide that number by 12 to get an average figure for each month.

Determine if You Are Living Within Your Means, Drum Roll Please...

Now for the moment of truth. You'll need to start with your incoming money, and then subtract the total of your outgoing money and you will see clearly whether or not you are living within your means. Because of the ease of using credit cards, many people truly have to idea whether or not they are living within their means.

Simply put, if Monthly Income is greater than your Monthly Expenses, you are living within your means. Otherwise, it's time to start making some serious changes.

Now that you better understand where you stand financially, it's time to set up your budget.

Setting Up the Budget

If you find that you are living within your means, you will need to determine whether you want to continue spending at the same rate, or if you want to put aside more money for savings. At this time in your financial life, it would probably be a good time to set a goal to start saving for. Do you own your own home yet? How is your retirement plan coming along?

If you do decide to set a goal, you will first need to give yourself an amount of time to meet it. Do you want to buy a home within a year? Then you know that you have one year to meet your goal, so you will have to break it down per month. For instance, if you know that you will need a $12,000 down payment for your home, you will need to save $1,000 per month. What expenses can you cut down on in order to save it?

If after examining your finances and you discover that you are not living within your means, you have some serious budgeting to do.

Steps to take for Those Not Living Within Their Means

Limit credit card spending

Start by limiting your credit card spending, using your cards for only those things that you need, and not those that you want. In addition, you should watch your cash expenditures closely, carefully logging them so you can understand where your money is going.

Cut back on regular expenses

Now, look closely at your regular expenses. Are there areas where you can cut back? If you spend $450 per month on food, could you get by with $400? How about entertainment - could you see your way to going to the movies three times a month rather than four?

Pay off debts with the highest interest first

When deciding what order to pay off your debts, always look to pay the debt with the highest interest rate first. This will allow you to make the most use of your money, because when you are paying a lot of interest, very little of your payment actually goes toward the original debt.

Put it in writing and check it every month

Put your new expenses in writing and then guard that you adhere to them. Every month to make sure that your budget is realistic, and adjust what you need to. In other words, you'll need to carefully track where your money is going, and then analyze it at the end of every month. If you find that your budget is too strict, adjust it because if not, you could just be setting yourself up for failure.

Success of a budget depends largely on how you look at it. For example, if you see it as a negative thing - like a strict diet - it will be difficult to keep. But if you see it as a way to get out of debt and into a comfortable retirement plan, you will likely be much more successful.

Are you ready to start? Great! Pull out those old statements, and make a commitment to yourself, and to your family, to get your finances under control once and for all. A year from now, you'll be happy that you did.

Summary

Start by categorizing your expenses. Remember, not everybody's categories will be the same
Stark keeping track of your cash, or use a credit or debit card to make tracking easier
Calculate your monthly income. It should be more than your expenses
When setting up your budget, set realistic goals
Those not living within their means will need to cut their expenses in some area
Keep track of everything in writing and check back with your budget regularly

Now that you are well on your way to getting your finances in order, lets take a look at one of the ways you can begin to build or re-build your credit, Piggy-backing On Someone Else's Good Credit