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Budgeting in Easy 3 Steps

Many people think that budgeting is really complicated. It's not. All you have to do is create a spending plan and then try to follow it as best you can. The reason why you create a spending plan is to prevent yourself from spending more money than you earn. For a budget to work, you just review your progress at the end of each month to see how you are doing. If you spent more than your spending plan called for, then you need to either adjust your spending, increase your income or adjust your budget.

If you would like to put together a simple budget (or spending plan, as some call it), just follow these three steps:

Step One

  1. Start by gathering your credit card and bank statements for the last month so you can see what your living expenses are.
  2. Then take a blank sheet of paper and write down these headings: Housing Expenses, Living Expenses, Work Expenses, Personal Expenses and Payments. Under each of these categories, write down the expenses that you see recorded on your statements.
  3. Finally, add up all of your expenses from the different categories.

Congratulations! You have just completed your budget outline. You can come back to your budget later and break down the general categories into more specific categories. For example, Personal Expenses may have some subcategories called clothing, tobacco, alcohol, eating out, entertainment, hobbies, gifts, vacations, etc. Don’t worry about being too specific on your first try. Just try and generally group things together.

Step Two

To fully understand your situation, this next step is extremely important. Compare the amount that you are spending in a month to your income for that month (to find out how much you are spending each month, just add up all of the monthly expenses in the budget outline you just created). To find out what your monthly income is simply use your bank statement to add up the deposits in your bank account. If you feel trapped and you are living on credit, then you will probably notice that your monthly expenses are more than your monthly income. If you continue like this, you are headed for financial disaster.

Step Three

So here is how you can fix your situation and get out of your debt trap. You will need to work on one of these three options.

  1. Decrease your expenses. When you look over your budget, you should be able to find areas that you can probably cut back. If you just cut back a small amount in a few areas, you will probably be surprised by how much money you can free up.
  2. Increase your income. Could you work more overtime, take on a second job, take in a student or rent out the spare room?
  3. Do both. Decrease your expenses and increase your income. If you can do both, you can potentially make some serious progress in reversing your situation.

However you choose to free up existing income or generate more income, try not to use too much of your new found income to improve your lifestyle until you have paid off your debts. Living within your means and paying off your debt won’t be quick and easy. It took a while to get into debt, and it’ll take a while to get back out again. Re-examine your priorities, tell yourself you can do it and dig in.

What happens if you do nothing

As the old saying goes, if you do what you’ve always done, you’ll get what you’ve always had. Nothing is more true with finances – if you spend like you always have, not only will the time pass and you’ll still be in debt, but you’ll be that much more in debt because of interest charges. Stop feeling trapped and do something about your situation now. It’s worth it.

For more info

If want to learn how to improve your budget or get a list of detailed budgeting categories, download this PDF.


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