If you want to get out of debt and stay that way, you need to know exactly what is going on with your hard-earned money. In other words, fall in love with the idea of knowing where your money goes.
You need to be smart, be committed with your record-keeping, and disciplined in sticking to your budget. It's a little bumpy initially, but the commitment to keeping track of your income and expenses in a life-long journey will turn into an easy habit.
So how do you start?
Step 1: Allocating your money
Before you begin creating your budget, you will need two pieces of information: Your income and your expenses. Income generally comes from two types of sources. The first is the income you earn from your job or any work you do. The second type of income could be income that you derive from your savings and investments. Basically, the income you earn encompasses the following:
- Your wages and salary, bonuses and commission received
- Your primary job
- Freelance or part-time work
- Interests and dividends earned from savings and investments
- Stocks, bonds, mutual funds, and any other financial products
- Real estate income
- Social security
- Insurance settlement
- Alimony & Child support
- Inheritance & Trust funds
- Hobbies (if you're earning an income from that)
Step 2: Gathering your financial records
Spending money is unavoidable because we still need the essentials for survival. That's why the first exercise involved distinguishing between your needs and your wants before anything else. Keeping all your receipts and bank statements will help you discover what your true spending habits are. To make creating a budget easier, you need to start by gathering all your financial records:
- Your payslips
- Your bank statements
You'll need your bank statements so you can go over line by line and see exactly what you're spending on and what patterns emerge. Next, you will need to assign your income to a category in your budget for the month ahead. Gather your payslips and bank statements according to:
- Your bank account
- Spouse/partner's bank account
- Commissions or benefits (if any)
- Extra income (if any)
When allocating your funds, the following categories need to be included in your budget:
- Savings and investments
- Fixed expenses such as Rent, Mortgage, Insurance, Internet & Phone bill, etc.
- Variable expenses such as Groceries, Medical expenses, Clothing, Home maintenance, Leisure, etc.
Step 3: Making use of Apps, Spreadsheet & Tax Calculator
Spreadsheets, Apps, and templates like these can easily be created in Microsoft Word or Excel, depending on your preference. This gives you a much better overview of where you can afford to be cutting back and where you should be directing more of your funds toward.
Here are some templates you can use:
Budget Tracker & Planner by Mint
Taxfyle - Income Tax Return Calculator
Step 4: Keeping Your Records
Keeping track of all your income and expenses records is an absolute must for both your budgeting and your tax matters when you need it. Keeping track of every detail might sound like a tedious affair, but you'll be glad that you did it. Here are some tips to help you stay on top of your record keeping:
- Designate a fire-proof storage space for your receipts
- Use folders and tabs to categorize receipts
- Go through your receipts again at least once or twice a month
This article is copyrighted by Travelers Today, the travel news leader
