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Creating a budget is the first important step in organizing in your financial life. We cannot overemphasize the importance of a budget for successful financial planning. To start with you have to provide as much financial information as possible. The purpose is to know where your money comes from and where it goes. In budgeting, there is no expense or income too small to record. The essence of budgeting is to account for every penny, dime and nickel. For beginners, there are seven steps to creating an effective budgeting process:-
1. Collect every financial record available. This must include bank statements, (get the latest statements), utility bills, any records regarding sources of income or expenses. The aim of this is to create a monthly average. Get as much information as possible.
2. Start by recording all your sources of income. Whether in business or in formal employment, collect all the records. Record this as your monthly income.
3. Record all your monthly expenses. List down all the expenses you expect to incur in the next one month. This should include all mortgage payments car expenses, groceries, utilities; entertainment, laundry, insurance, school expenses, etc.
Always remember there are two kinds of expenses: variable and fixed. Fixed expenses are those that remain the same every month, like mortgage payments, car loan payments, credit card payments and so on. Variable expenses are the types that change from month to month, such as groceries, gasoline, entertainment, gifts, eating out and so on. It’s important to record these in detail.
4. Income & expenses; if your records show more income than expenses, you are off to a very good start, and hopefully a very promising start. That means you can adjust to prioritize certain areas like retirement, and also arrange to pay more with a view to retire unnecessary debt like credit cards.
If expenses are higher than income, then certain adjustments must be done within the shortest time possible. There is danger in spending more than you are getting, and the earlier you arrest this situation, the better. One of the major purposes of a budget is to exercise full control of your financial life.
5. Reorganize your expenses. If you have successfully and accurately recorded all your expenses and your income, the aim is to track your expenses and income columns and ensure they are equal. The must balance; that means your income is accounted for and budgeted for specific expenses each and every month.
6. In the event your expenses are more than income, that’s a sign of danger. You need to look at your variable expenses and begin there. Make adjustments and find areas to cut. Eventually, expenses should be within the income.
7. Take control of your monthly budget and review it on regular basis. Always remember to compare the actual and your budget. This will show you where you did well and where you need to improve. A variation beyond ten percent should raise alarm, and adjustments made quickly before the situation gets out of control.
Ignoring to budget has led many to financial ruin and disaster.
True, it’s a bit tedious; planning is taxing and time consuming. In their bestselling book “Millionaire nest door”, Thomas J. Stanley and William D. Danko prepared a questionnaire to present to the millionaires they were interviewing, and in it were four questions:-
- Are you operating on a regular budget?
- How much did your family spend last year on food, clothing and shelter?
- Have you set goals: daily, weekly, monthly, annual and lifetime goals?
- How much time do you spend planning your financial future?
Incidentally, 80% of the millionaires interviewed answered in the affirmative. This book is highly recommended for all who wish to take control of their financial lives and learn from real life examples provided by these two Professors.
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