The steps to creating a budget may not be an exciting task unless you are a financial nerd such as myself. Creating a budget is a necessity if you plan on accomplishing any financial goal.
The most crucial component of a budget is knowing all the debt you have and all the income you have.
Your debt may include:
- Credit card debt
- Student loan debt
- Car loans
- Personal loans
- Home mortgage
Your income may include:
- Take home pay/salary
- Part time pay/salary
- Child support
- Alimony
- Investment/rental income
- Any money you receive that would be a positive deposit into your checking account
The firs thing you should do before creating a budget is to:
Examine Your Financial Records
You will need to look at all your financial documents in order to determine how much you owe in total to a creditor and how much your monthly payments to the creditor are. This will help you to determine how you may want to pay off the debt (debt snow ball method or the debt avalanche method).
It is VERY important that you are honest with yourself regarding your debt. You MUST look at every financial record that shows who you owe and the amounts owed. Do not leave any debt out. It is VERY important that if you owe any tax liens to the state or federal government that you do not leave that out of your list.
When I first decided to get serious about my debt, I was TERRIFIED to open up my credit card statements. I had a habit of just sending any amount in my head that I believed was sufficient to pay what was owed for that month. Little did I know the amount I was sending was just enough to pay what was due for the month. In essence, I was paying mostly the interest and not enough of the principle.
Take Notes of What You Discover on Your Financial Records
- If there are any incorrect charges/debits on your checking and credit card statement, you will want to address this with your bank and creditor. I discovered that a hotel had charged me twice for the same transaction and I contacted the hotel and had them make the adjustment.
- Look at your interest rates on your credit cards. Is there one credit card with a lower balance that you can do a balance transfer? Is there a credit card with a better interest rate?
- Organize your financial statements/records from the most debt to the least debt.
List Your Debt:
Now that you have everything organized, list your debt from least to greatest. This is what is commonly referred to as The Debt Snowball Method.
After you have created your debt snowball, calculate your MONTHLY debt payments and compare that to your MONTHLY income.
How much is left over?
Do you eat out too much?
Are you out clubbing too much?
Should you cut or reduce your cable?
Are there any tasks you pay others to do (housekeeping) that you can do yourself?
Whatever it is, take a hard look at what goes out each month and rearrange your finances to keep your money and pay any excess towards your debt.
It is no fun to prepare a budget and to face the honest and cold truth as to where you are financially but it is something that must be done. So if you have been hesitating preparing your budget start today!