3 steps to building a budget

Do you make a budget before payday, or you just spend as you are handed the money?

Many find it difficult to stick to a budget with an abundant of temptations and luxuries. What they tend to forget is that a budget can be handy, especially when you are in debt.

Not only is a budget an essential tool in building your financial wealth, it allows you to financially assess whether or not you can afford certain luxuries in your life before you commit to buying them.

By drawing up a budget, you are able to distinguish between your absolute essentials such as payments on your car, rent , water, lights and school fees, as opposed to other luxury purchases such as eating out, entertainment and retail shopping.

Compare Guru also recommends following a budget if you are currently experience money issues and your debt seems to be piling up around your ears. Following a budget helps you plan for what you are going to do to decrease your debt and where you can compromise to ensure your debt is paid back timorously and without penalties.

Compare Guru gives 3 steps to building a budget below;

1. Work out your expenses

Your first form of business is to find out exactly how much you spend each month. This should be down to the last penny that you spend, including when you pop into the shops in your lunch break.  You can do this by consulting your bank statements and receipts.

As most expenses are broken up into monthly instalments, such as insurance and car payments, the most accurate financial picture would be to calculate your average monthly expenses over six months or a year.

Calculate everything you have spent such as groceries, water, electricity, car payments and then divide by the amount of months for your average monthly expenses. Remember that being thorough when you are calculating expenses is vital and will create a realistic budget to aid you in the future.

An important expense to remember is an unplanned expense;  try to factor in certain payments such as car repairs by avoiding living from pay check to pay check. If this is currently your financial status, strive to find ways you could minimise costs such as packed lunches for work, free entertainment and less frivolous spending.

2. Determine your income

Now that you know how much money you need to stay afloat financially each month, find out what your actual income is.

Besides your regular salary, get a clear picture by adding any extra funds that come your way throughout the year. These funds include cash gifts, sale of items online or via garage sales, and don’t forget other income sources like child support, interest, dividends and rental income.

3. Cement your savings and debt payoff goals

To determine realistic savings and debt payoff goals, you should find out if you have a budget shortfall or overage. You can do this by subtracting your monthly expenses from your income.

You know your budget is working if you find that you are making more money than you are spending. This amount can be allocated to your savings and to pay off any outstanding debt.

If you find that you are spending more than you should, then it’s time to make some cuts in order to start saving something and halting any further debt.

The best way to figure out where you can cut expenses is to track your spending and record every expense for a month.

A budget, like many other financial implications, is something most of us like to ignore until it is too late. By breaking the habit of living from paycheck to paycheck, your financial outlook and how you view money management will undoubtedly improve and move you onto better things.

Visit Compare Guru today for excellent financial tips and advice.