If you are looking to get your finances in order or reduce your debts then you have to get back to basics and the best place to start is with a household budget. The purpose of a household budget is to figure out how much money you have coming in and where it is going out on expenses. Now you are armed with all the information it’s time to make some changes to achieve your goals.
Let’s take a look at the steps involved in creating a household budget.
1: Calculate Your Incomings: This should be a straight forward task. You need to calculate your average incomings per month such as pay checks (after tax), bonuses and dividends from any investments. Don’t just think about your pay for the last month, you should bear in mind occasional payments such as bonuses or dividends from investments and then work out the average value of these per month (over the course of a year).
2: Calculate Your Outgoings: Calculating your outgoings is a little bit more complicated as you spend money in far more ways than you earn it. Go over your statements for your bank account and credit cards for the past few months and figure out how much you have in outgoings each month and where it is going. Credit card and debit card transactions may be easier to keep tabs on but it’s hard to see where cash withdrawn from ATM’s has ended up. It may be a good idea to keep a spending diary with you for a couple of weeks to take note of all your cash spending. Hopefully you will find your typical outgoings are lower than your incomings but often this is not the case. If you find your outgoings are higher than your incomings then you are pushing yourself into debt each month and need to take action to reverse this trend.
3. Classify Your Outgoings: Once you have worked out all your outgoings it makes sense to classify them together into categories such as groceries, utilities, clothes, entertainment, loan repayments, travel and so on. Doing this will let you see where most of your money is going.
4: Sort out the essentials, the nice to haves and the not required: Now you can see where your money is going then you need to decide what can be changed. You may find some of the expenses are fixed and cannot easily be changed such as rent or mortgage repayments, car registration and so on. If you need to make large cutbacks then perhaps even these items could be reduced by downsizing your home. If you don’t want or need to go to such lengths as moving home then you need to seek other areas for cutbacks. You can reduce your monthly bills in lots of ways such as becoming more energy efficient around the home, switching utility companies, using VOIP for calls via broadband or cutting out pay-TV packages. Common areas for cutbacks are reducing your entertainment and shopping expenses for items such as dining out, buying music, clothes and so on.
5: Make Goals: You should now have figured out what you are spending and where you can make cut backs. You shouldn’t be aiming to create a budget just to survice on; you should be looking to have spare money to increase your net worth each month. A couple of methods of raising your net worth is by lowering your debts or by raising your savings. If you are in debt then the goal should be to get out of debt as soon as possible. Set goals for how much you want to pay off per month and build this into your budget. Once you have paid off debts then the focus can become on saving money each month via a high rate online savings account. High interest savings account products have high interest rates and accumulate quickly when you make regular monthly deposits. You should make it a goal to increase your net worth each month by either reducing your debts or boost your savings so you have money saved for unexpected expenses or to purchase large items debt free. There are many other options for extra money in your budget such as investments in property and so on.
6: Keep Yourself in Check: Make sure you keep reviewing your budget and looking for areas where you can make further trimmings and savings. A budget is not a survival plan, it should help form your long term financial roadmap to improve your long term net worth.
This article is written by Richard Greenwood of www.compareyourbank.com.au which compares bank products and savings products to help consumers find the best credit card. Products can be compared side by side looking at comparable features before making an application online.