Four Steps to Budgeting

Four Steps to Budgeting
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Breaking the budgeting process down into manageable steps can help you to understand it, and can increase the chances that you will stick with it and gain control of your personal finances. Developing an objective understanding of money as a tool can help you use it to your advantage by minimizing waste and maximizing return on your dollars.

Keeping Records

To control your spending, you need to have a comprehensive and ongoing understanding of where your money goes. You can easily do this by noting down everything that you spend in a notebook or in a computer application such as an Excel spreadsheet. Without this record, small but repeated expenditures for things such as magazines or haircuts can add up to a substantial amount of money. By maintaining a written record of expenditures, you can give yourself the ability to base your financial decisions on hard facts about where your money is going.

Distinguishing Wants and Needs

Cutting back on spending needs to be done in the right places. Some expenditures, such as mortgage payments and food, are not avoidable, and delaying them or skimping on them can only lead to hardship. By identifying which of your expenses are necessary and which are indulgences, you can identify areas where cutting back is possible and even recommended. For example, your comprehensive record may reveal that you're spending 50 dollars a month on ice cream. By cutting back on ice cream and applying the saved money to paying down debts, you can reduce both your sugar intake and your carrying costs.

Cutting Waste

Many personal budgets include a surprising amount of waste. Money that is spent on debt interest or on services that you never use isn't providing you with anything useful. By prepaying debts and eliminating unused services such as magazine subscriptions or cable plans, you can free up money to be used more productively. Analyze your budget for areas where savings can be had. For example, consolidating car insurance and home insurance with the same company can lead to lower cumulative rates. Taking out a bank loan to pay off credit card debts can substantially reduce the interest that you pay every month.

Investing vs. Spending

Not all spending is created equal. Putting money into something that retains its value, or even increases in value, isn't the same as spending on ephemeral things. The money spent on a consumer durable such as a kayak is much more recoverable than the money spent on a vacation. Cars are notorious money ptis; you will almost never get as much out of a car when you sell it as you put into it. Houses, on the other hand, may increase in value every year. Maximizing your spending on items that maintain their value, and minimizing money spent on ephemerals, can lead to greater long term financial security.