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How to Create a Practical Budget

by on January 3, 2013

Budgets rock! With a budget, spending doesn’t have to be a constant guessing game. It’s worth putting in the time to create one. When you know exactly how much money you have to work with, you can make smarter spending choices. Here are some expert tips to help you on your way.

Know your limits

How much money do you have to work with each month? To really answer this question, you’ll need to take all your income sources into account. How much is your monthly paycheck (after taxes)? Do you get any money from your parents or relatives? Are you receiving financial aid for school? Do you earn income from any investments or high yield savings accounts? If you don’t know how much you’re getting from one of these sources, make a conservative estimate. Don’t factor in lines of credit or “future” money sources, like a job you don’t have yet. Focus on the funds you have right now.

Know your habits

Many people try to create new spending habits without understanding the habits they already have. Don’t get ahead of yourself (we’ll cover that later). Pull out your monthly account statements and start looking for patterns. How much are you spending on housing (including utility bills and maintenance)? What about transportation? Food? Coffee? Insurance? Designer shoes? We really do mean everything. Next, add up your average monthly total and compare it to your monthly spending limit. If you’re spending more money than you have coming in, it’s time to cut back.

Know your priorities

Things like food, housing, transportation and paying down debt need to take priority over going out to eat and going on vacation. We’re not saying you shouldn’t do those things. You just need to treat them as extras, not priorities. We actually recommend setting aside part of your budget just for purchases like this. Splurge responsibly so you don’t become another statistic for average household debt.

You’re the boss

Knowing your budget will also help you the next time you need to borrow money. When you’re applying for a loan or credit card, your banker can answer questions and make product recommendation, but you have to have the final say, especially when it comes to deciding how much to borrow. Your lender will approve your loan based on your debts and income, not your living expenses, and these can be a much better indicator of how much you can realistically afford to borrow.

There’s an app for that

Don’t consider yourself a math whiz? That’s no excuse for not budgeting. If Excel spreadsheets don’t do it for you, consider downloading a budgeting app for your smartphone. Most budgeting apps will do the math for you and spit out the results via user-friendly charts, graphs or lists. PageOnce, MoneyStrands and SplashMoney are a few of our favorites. No smartphone? You can also try free budgeting software for your home computer. We like BudgetPulse, dsBudget and GnuCash. We recommend experimenting with different programs to find out which one works best for you. Happy budgeting!

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