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Set your goals
Make a list of your financial goals, then divide them into three categories:
Short-term goals.
These cover things like getting out of debt or paying for class materials.
They're useful because they let you see results within a matter of months.
Medium-term goals.
These take a little longer, but really need planning to happen. They include
things like paying for your next few years of school, or could include
new tires for your car.
Long-term goals. These
include retirement and estate plans. Because these goals require the most
money, they also require the most time and planning. Most college students
do not think about such things until after they're done with school.
Calculate how much
each goal is likely to cost and estimate a time frame for when you'd like
to accomplish it. Then prioritize them.
Assess your income
How much money do you have to work with? Figuring this out could be as
simple as checking your pay stubs, or it may be as complicated as tallying
your salary, any extra income you receive, and the returns on any investments
you may hold. Don't forget to deduct your income taxes to establish the
actual money (or net income) from which your spending will come.
For budgeting purposes,
it's best to tally income on a yearly basis, which you can easily divide
(by 12) into a monthly basis. While a budget forecast usually takes a
full year into consideration, it's formulated and handled on a monthly
and weekly basis.
Add up your expenses
Adding up and categorizing your expenses will clarify how you actually
spend your money. Once you have a handle on where your money goes, you
can start making adjustments accordingly.
Fixed expenses. Gather
a month's worth of checking account information, credit card bills, utility
bills, savings and/or retirement fund contributions, and any other records
of regular expenses you might have. Add everything together.
Discretionary expenses.
Faithfully record your variable expenses for one month. This includes
gas and other transportation costs, groceries, laundry and dry cleaning,
entertainment, gifts, clothing, subscriptions, club memberships, doctor
visits, prescriptions, and the like.
Next, use the totals
for fixed and discretionary expenses to calculate your overall expenses
for a calendar year. This big picture will not only give you perspective,
it will help you decide where to adjust your budget if needed.
Break it down. Use
your fixed and discretionary totals to organize your spending into categories.
Utilities such as telephone service, electricity, garbage collection,
and water can go into one category. Food and household products such as
toilet paper, dishwashing soap, and paper towels can go in another.
Organize the categories
according to your spending habits and needs. For instance, some people
might split out a separate category from entertainment expenses and devote
it to books and magazines, while others might have a separate category
dedicated to CDs.
Don't forget emergencies
and unusual expenses. Plan to set aside a little each month for emergencies
and unusual expenses (if you only buy clothes twice a year, or you need
to save for dental visits, for example). When this savings account grows
larger than you think you'll need, roll some of it over into your long-term
savings.
Tighten your belt
With your goals firmly in mind, make an initial subtraction of your total
expenses from your net income. How much is left? Apply this money to your
goals.
If you're disappointed
at how much is left--or if you need more to meet demanding goals such
as paying off debt--it's time to tighten your belt a little. Some good
ways to do this are:
Identify dissatisfying
spending. With a bird's-eye view of your spending, do you notice your
money flowing in a direction that really isn't all that important to you--especially
in light of your goals? By being aware of your spending habits and changing
them, you may be able to save a surprising amount of cash.
Examples of common
areas where people overspend include eating out (it's much cheaper to
cook at home, or bring lunch to work), taking taxis (mass transit is cheaper),
and buying magazines or books you never read. Changing these habits may
take some discipline, but it won't change your quality of life.
Cut back. Do you spend
too much on things that make your life easier or more fun but drain away
your cash? Whatever you do, you don't want to feel deprived, so don't
completely cut a category that's important to you. Instead, see where
you can cut without drawing blood. These choices are entirely up to you
and also depend on the aggressiveness of your goals.
Some examples might
be purchasing fewer magazines or CDs, using the library instead of buying
books all the time, or waiting to rent videos of the movies you feel you
don't have to see on the big screen.
Set your budget
With your goals and belt-tightening measures in mind, you can set up a
realistic monthly budget using a budget book, spreadsheet, or just some
plain paper. You can even download budget forms from the Internet (type
the words "personal budget" into a search engine), although
you'll need a compatible spreadsheet program to open some of these forms
once you've saved them onto your hard drive. If you create your own form,
you can design it any way you want. Once the form is set, here's how to
proceed:
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List categories.
List your different categories and take into account the amount
you've budgeted to spend on each (this may be included on the budget
form, or listed on a separate sheet of paper as a reminder, depending
on your budget's design).
Keep track.
At least once a week, tally what you've spent and fill in your spreadsheet
accordingly. If you find you've spent all of your entertainment
allotment in the first week, examine whether or not it's realistic.
If it is, hold yourself to it. You'll be able to spend money on
entertainment next month, anyway--a fact that should keep you from
feeling deprived.
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Cash flow. At the
end of the month, you should have money left over to apply to your goals.
If you've met your budget, it will be the amount you expected. If you
have more (or less) than that amount, re-examine your budget to see if
this is a one-time windfall (or shortfall). If not, adjust your budget
accordingly. Budgets take time to settle in. You'll need to readjust categories
that are too tight or padded, and you'll need to plan ahead for times
when your expenses temporarily mushroom.
With the help of a
realistic budget, you can plan for security during emergencies, take the
vacation you've always dreamed about, and prepare yourself for a comfortable
retirement. A realistic budget is your ticket to financial freedom--and
there's nothing limiting about that.
Adapted from Learn2.com
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