4 Steps to Creating a Budget
Whether you are trying to run a successful business or a successful household, financial stability is very important. The easiest way to ensure this stability is by creating a budget and sticking to it. Without a budget money can be loosely spent, often without a true purpose. By putting a budget in place you gain the piece of mind that your money is being used properly. This frees your time up to take care of the more important things going on in your business or house. That is why we created 4 Steps to Creating a Budget.
The first step to create a budget is to find out how much money is coming in. Your net income is the total dollar amount in which you take home (meaning after taxes, social security, 401(k), etc.). This is important because in order for a business or household to be profitable, it must not “live beyond its means”. In other words, it must never spend more than it makes.
The second step in creating a budget is to identify your goals. Goals are typically placed into one of two categories: short-term or long-term. Some examples of short-term goals include: saving for a vacation, Christmas gifts, or paying off a debt. Whereas long-term goals include: saving for retirement, children’s college, or maybe saving for a house/investment property.
Goals are a very important part of creating a budget because without them we are working to survive, not to live. Knowing that you are one step closer to your goal each time you collect a paycheck can make work far more rewarding.
Now for the third step we must determine all of the expenses that come along with running our business/household. Expenses can also be categorized in to areas: fixed and variable. A fixed expense is one that doesn’t change from month to month (i.e. mortgage, insurance, car payment, etc.). A variable expense is one that can alter from month to month (i.e. groceries, clothes, maintenance, etc.).
Spend 30 minutes identifying all of the expenses that you have been charged over the past 3 months. Once you have done so, ask yourself which of them are NEEDED for your business/family to continue to operate. Often times a big portion of our paychecks will go toward things that do not help us in achieving our goals. If something is not a needed expense or a goal then it is hindering what we are tying to accomplish. Identify these charges and see if you can avoid them next month.
The final and perhaps most important step of creating a budget is to track your spending. Each day track what you spend (on paper or app etc.) and once a month take a look at all of your monthly spending to ensure accuracy and to see if you executed the plan the way you intended. “Was the money spent purposefully? Am I closer to my goals?”
Creating a budget is one of those things that everyone knows they should do but we rarely execute. Don’t be discouraged by your results initially. Executing month after month will inevitably make your business/household a financial success. The way to wealth is a lifelong journey and therefore deserves lifelong attention.
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