Learning Your Budget Basics
Budgeting is one of the cornerstones of effective money management. Learning to keep track of where your income is coming from, and where it's going, can help you better understand and control your finances.
To succeed financially, you must first be able to create a budget, then have the discipline to follow it, and finally, modify it as your lifestyle changes.
Plan for Emergencies
Life is full of all sorts of unforeseen events, most of which will have a financial aspect. Preparing for these unexpected occasions is an important part of budgeting. An emergency fund should be an integral part of any personal budget.
In fact, that's where you want to start. Plan to set aside at least six months of living expenses. This is your emergency fund. It should be invested in a safe, short-term product, like a bank account.
A savings account might pay a little more interest than a checking account. Both are equally safe, assuming the bank that provides both accounts is insured, and most are.
Another option is a money market deposit account, which is simply a hybrid checking-savings account — it's a savings account with checks. Whichever account you choose, an emergency fund will help ensure you're financially ready for whatever life throws at you.
Track Your Income and Expenses
One of the first skills you must learn in personal finance is to know the sources of your income and the items these resources are spent on.
Income can include salary and wages, but it can also incorporate other inflows that are frequently forgotten. These can include dividends from brokerage accounts, interest from bank accounts, or capital gains from the sale of a home or other property. Even an unforeseen inheritance is a source of income.
There are many types of income, and you'll want to incorporate them all into your financial planning.
Monitoring your expenditures is equally important. Too many people get in trouble financially because they ignore this crucial aspect of money management. Keeping a record of expenses can help you to do a better job overseeing your financial life. Remember to save your receipts and go over them at the end of the month.
Keep a Written Budget
Sitting down and putting your income and expenses on paper can help you see your finances in greater detail. It also creates a record that you can revisit later to evaluate how you're doing in life financially.
Typically, a budget is written for each month, before the month actually begins. All sources of income are listed first. Next, each individual expense that is expected is recorded. Food expenses, transportation, and housing costs are just a few possibilities.
The difference between the two categories should be noted. Of course, your goal is to have your income outweigh your expenses. We'll look later at strategies to help you accomplish that.
Prepare for Success
The world's most successful companies monitor their income and expenses on a regular basis in a method similar to the budgeting techniques described above.
By analyzing their financial lives, these billion-dollar organizations are able to more effectively reduce costs and increase revenue, which is the ultimate goal of money management. If it has worked for them, it can work for you, too.