Budgeting: Eliminate Debt and Prepare for the Futuret

When considering the state of your personal finances it is important to examine them from both a short term and a long term perspective. In both cases an individual should be able to meet his expenses and work towards his goals without accruing excessive debts. If someone is currently able to pay his bills and reach his short range goals but is unprepared for the future then some financial changes need to be made. Likewise, if an individual is on tract for a comfortable retirement but is not able to pay his monthly bills then change would also be necessary. A budget is a tool that can help an individual successfully reach their short term and long term financial goals.

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• Determine your actual expenses. This step may take a couple of months to complete. Save receipts and record expenses that occur on a daily basis. A failure to track actual expenses often results in figures that are underestimated.
• Establish goals. These would include future purchases, vacations, savings, retirement, etc. Calculate how much it would cost to accomplish these goals.
• Record your income. Be sure and include additional income such as bonuses, money from side jobs, etc.
• Calculate monthly totals. Take the amount that you have determined would be necessary to reach your goals and break them into monthly figures. Add these figures to your actual expenses to determine your monthly total. Compare this total to your total income. If you are faced with a deficit then spending cuts are necessary.
• Establish totals in each category. It is important to monitor the amounts of each individual expense. This helps to ensure that neither too much nor too little is being put toward each category.
• Establish a discretionary fund. If you have additional money after all expenses (and savings goals) have been met you can establish a discretionary fund. This fund can be used for entertainment purposes. However, it is important to limit your spending in this area to the funds that are actually available. Borrowing from others categories can lead to shortfalls.
• Re-evaluate your budget on a regular basis. It is good to take a close look at your budget once or twice a year to make sure that everything is still relevant. If factors such as income, expenses, or goals have changed then the budget may need to be adjusted.(1)

(1) http://www.loans4students.org/Resources/MoneyManagement/Budget.asp

Mark Carney is a professional consultant with First American Debt Consolidation and Loans, a debt consolidation service specializing in financial education, credit counseling, and debt management services nationwide.