In times when money is getting a little tight and the job market more uncertain it is important to learn how to control your spending. Learning to effectively create a budget as well as being able to stay within it's boundaries will not only help reduce stress but will also teach you the basics to plan for a successful retirement. Below are 5 great tools to use to successfully create and manage your household budget.
Fixed Vs. Variable Costs
You might remember these terms from your economics class some time ago. Fixed and variable expenses are not just important to know for a business, but should also taken into consideration when creating a personal budget. In a nutshell, a fixed cost is a cost that will occur no matter what and are typically related to a necessity. Your rent or mortgage is a great example. A Variable expense on the other hand varies in size and is dependent on the frequency of use. Having a cell phone plan that is not a flat monthly rate, but charges you by the minute is a good example.
It is important to differentiate between the two costs when planning for your current as well as future finances. If you want to reduce financial stress than the key is to reduce your fixed expenses to the minimum level without having to compromise too much quality of life. Think about this when renting a place for example. Having a lower fixed expense each month will give you much more financial freedom: If times are "bad" then you have the option to spend less, and when times are "good" you have the luxury to spend a larger portion on fun things (variable) such as shopping sprees, vacations, dinners, and so on.
Itemizing and Creating Budgets within each Expense
Write down each expense first such as: Rent, Insurance, Utilities, Cell Phone, Groceries, Shopping, Entertainment, and so on. Next write a dollar amount next to each item. This amount is your spending limit for each expense that you will have to stick to. This will be quite easy to do for your fixed expenses since they are not changing. Groceries should be considered a fixed expense since you will have to eat no matter what. Think about how much you are spending on groceries each month. Start by thinking about how often you go shopping, and how much you spend on average on each trip. Do this for all variable expenses as well. When you are done, add up all the numbers to get your total monthly budget.
Compare Your Budget to Your Income
Look at your paychecks and add them up so that you get your monthly total income after taxes. If you get paid bi-weekly then this means you will be getting paid 26 times per year. Take a paycheck and multiply the amount times 26. Then, to get the monthly total, divide this amount by 12.
You now know what your monthly post tax income is as well as your monthly budget. Make sure that your income is higher than your spending and you will be in good shape. If it isn't, than you have two options: 1. Work more or get a second job to increase your income, or 2. lower your budget. If you are planning on re-evaluating your budget, think about what item on your costs to reduce that will have a minimal effect on your quality of life. If you budgeted $200 for entertainment, but never go out for a drink, dinner, or movies, then this might be the right cost to reduce.
Be Persistent and Consequent
Follow your budget and stick to it! Creating a budget and then not following it is absolutely pointless. To follow your budget, keep track of your expenses. Find a system that works for you and follow it. One way of doing it is by creating folders labeled with each expense. Safe your receipts and put them in each designated folder at the end of each day. If this is too cumbersome for you, then think about purchasing a software to help you keep track. A popular one is Microsoft money. It can automatically keep track of each type of spending, every time when you are using credit cards that are linked to the program. Once again, find a system that works for you and one that you can easily follow. At the end of each month, do a quick review on your expenses and see where you can improve.
Plan Ahead
Sometimes expenses come up that are not planned for. Your car breaks down and to repair it will be quite costly is a classic example. Such expenses are common and sooner or later will happen. Because of such expenses it is important to plan ahead. Set money aside each month especially for this reason. The difference in your income and your budget will be the amount put into your "emergency fund". Knowing that you have such safety, will give you the ease of mind needed to live a stress-free life.
Hendrik Pohl is the owner and founder of United E-Commerce LLC. In his free time he enjoys sharing the things he has learned from starting successful businesses by writing and publishing articles for online magazines. If you are looking for Holiday presents that will allow you to stay within your budget, he suggests you look at the following cheap neckties, cheap bow ties, and cheap designer cufflinks.
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