Use our UK Finance guide and learn by experience. We outline pitfalls so that you don't have to learn the hard way, as many of us often do.
Sound Advice
Budgeting for Prosperity (Part 2)
Regardless of whether you're trying to manage your own personal expenses, or those of a large corporate business, without a budget, it's impossible to properly manage your finances. A proper financial plan and well put together budget are vital for your financial and emotional well being.
Subtract expenses from income
This calculation will leave you with a clue to whether you'll be in financial difficulties or not. If your expenses are more than your income, then you have whats called a negative expense to income ratio. Basically you are spending more than you earn. Eventually, prolonged periods of this kind of financial situation will lead to credit card debt.
Once you realize that you're in this position, you need to start looking at your expenses and seeing which you can reduce. Naturally you'd start with your flexible and discretionary expenses and see which of those you can reduce or eliminate.
Identify means of lowering your unnecessary expenses each month. When you set payment goals each month, you're responsible for making those payments. Hold yourself responsible for these goals and in such a way, you'll feel more compelled to reach them. There is no one special means to overcoming debt. However if you set goals, hold yourself accountable and then reach those goals, you'll be so much closer to financial freedom.
Also important is that when you're setting your payment goals, don't make them unrealistic. That'll only lead to disappointment and eventually non-payment of your debt and then a bad credit report. Don't set yourself a spending limit on groceries for $100 when you know that you normally spend more than $200. This will lead not only to an emotional setback when you miss that goal, but also a financial setback when you exceed that budgeted amount and are forced to take money from elsewhere.
At a later stage when budgeting becomes second nature to you, a monthly budget can be replaced with a quarterly budget that you can merely monitor on a month by month basis.
Savings
Don't forget to save either. Try to save at least 10% of your income each month towards a retirement fund or otherwise. Saving is one of the great secrets of financial wealth. With compounded interest on a high return bank account, saving your money can be a superb way to invest for the future.
If you're planning to save, which you should be, remember to first fill your 401k and IRA savings plans as these are good ways to accumulate money tax free. Once these accounts are used to the full, you can then find another savings plan like a money market account or a form of investment account. If you're able to have money stored somewhere for unforeseen occurrences, you'll be able to live comfortably and not wait anxiously for your next pay check before you can eat again.
Divide expenses by number of monthly pay checks
By dividing your expenses, that's all forms of expenses, by the number of monthly pay checks, you'll be able to see if your salary is sufficient to cover your monthly expenses.
If it doesn't, you either have to find a secondary source of income, or find a way to minimize your expenses without getting into bad debt.
By carefully applying the above steps to making a budget, we don't guarantee that you'll be rich and comfortable, but it's a good start in moving towards the financial freedom that is the American Dream
Read Part 1 of Budgeting for Prosperity
