1. Track your cash flow. First, identify where your money is going. For at least a month, track all spending -- from paying bills to buying new clothes to dining out. Note how much money you have coming in (your income after taxes). Keep tabs on fixed expenses (mortgage or rent, car payments, student loans, child care and other expenses that cost the same amount each month). Also track variable expenses – those that change from month to month. These may include store purchases like groceries and clothing, automobile expenses and entertainment (movies, concerts, dining out).
Free online budget-building programs such as Mint and Quicken automatically track deposits, credit card purchases and other expenses. You also can categorize purchases, such as automobile expenses or recreation. These online systems make budgeting easier for many people. But you can just as easily track your cash flow using pen and paper, or a spreadsheet. The key is to stay up to date with the information, regardless of the method.
2. Analyze your money habits. After you have a good picture of where your money is going, review your spending habits and identify areas where you can cut back. When looking for ways to reduce spending, remember that no savings is too small. Making coffee at home, brown-bagging your lunch or cutting out a weekly manicure all add up to more money in your wallet. Bigger money-saving steps include trading in your car for something with lower payments and refinancing your mortgage. If cutting back is not enough, you may need to look at ways to bring in more. This could mean taking on another job, searching for a higher-paying job or selling a second car.
3. Establish financial goals. Separate goals into short-term (which may include paying off credit card debt or saving for a down payment on a home) and long-term (such as saving for retirement or your child's college education). Determine how much you need to save each month in order to achieve your goals within your established timeframes. Try to put at least 10 percent of your income into savings. That may be a retirement or college fund, an interest-bearing savings account or a money market fund. See if you can consolidate credit card debt into a zero- or low-interest card and then pay as much as you can each month. Jump-start savings by setting aside any financial windfalls you receive, such as bonuses, tax refunds or yearly raises.
4. Get on the same page. You and your spouse should be in agreement on your budget goals and the steps to achieve them. This may require several discussions and budget revisions, especially if your spending habits are different. On the plus side, when you are both working toward the same goals, you can hold each other accountable, help keep spending in check, and enjoy the benefit of working as a team.
5. Review and revise your budget. To ensure your spending stays within the limits you set (and that those limits are reasonable), you must track and monitor expenses on an ongoing basis. You can do this via personal finance software, with a spreadsheet or with pencil and paper. Allow for changes if you discover that certain cutbacks were unrealistic or too restrictive. It is common to have to revise a budget several times before you have one that you can stick to.
People often view budgets as restrictive. Yet it is financially freeing to know with certainty that you are saving and spending smartly. Taking charge of your money is the best way to achieve financial peace of mind.
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