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The Nuts and Bolts of Building a Budget

[August 4th, 2015]

Part of being an adult is learning to spend within your means and make your money go as far as possible. Sitting down and making a budget is essential if you expect to pay your bills each month without running out of cash before your next paycheck.

Writing down a budget might not sound like anyone’s idea of fun, but it’s actually not that difficult. The first thing to do is schedule a time when you can sit down with your bills, bank statements, and possibly a partner who shares your expenses. Find a time when you have nothing else going on and can focus completely on the task at hand. Here are the things to have with you when you begin:

• A notebook and pencil
• A copy of your latest bank statement
• Paystubs or records of your earnings
• Copies of your most recent bills: rent or mortgage, utilities, phone, credit cards, student loans, car loans, any other monthly bills

You may also want to have your computer handy, so you can check in with online accounts, emails, and other things you don’t have paper copies of. The basic process is this:

• Make a list of your income sources and write down how much you earn each month after taxes, automatic savings withdrawals, and other deductions.
• Make a list of your regular monthly expenses, including rent or mortgage, utilities, bills, and also food, entertainment, clothing, and other discretionary spending.
• See how these numbers match up and figure out how to make them work better, so you have something left at the end of the month.

This is easier said than done, but doing it isn’t really that difficult. Divide your expenses into four categories: fixed, variable, necessary and discretionary. Fixed expenses are things like an installment loan, a phone bill, or a public transportation pass. You know what they will be each month. Variable expenses like utilities will change each month and while they may be predicted to some extent, they tend to fluctuate. Necessary expenses are things like housing, gas, and food. Discretionary expenses are things like going to the movies, out-of-town vacations, and clothing you could get along without.

Each expense will be in two categories: necessary or discretionary, and fixed or variable. The ones you want to look closely at are the discretionary and variable expenses. How could you make these numbers go down? Depending on how closely your income and your expenses match up, you may be looking to cut a large portion of your spending, or just a little bit. Think about how much cushion you’d like to have left at the end of each month, and whether you’d like to increase the amount you’re putting into savings (or begin putting money into savings, if you aren’t already).

Credit cards are another big consideration when you’re building your budget. If you owe credit card debt that you carry over from month to month, take a hard look at all your discretionary spending and figure out how you can put more money toward those creditcard bills each month. And consider not charging anything more to your cards until you have them paid off.

Once you have a budget in place, following it and keeping track of your money will be much easier. Welcome to the world of financial responsibility.

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