Managing one finances properly is a key part of long-term planning for large purchases, retirement, and simply not worrying about paying your bills. Careful research can help you better manage your money. There is a wealth of information to read, but if you’re first starting to organize your finances, it can be a challenge knowing where to start. As with many things the fundamentals are important. When you start taking control of your finances, one of the first steps you should take is building a household budget.
Five Steps To Build a Household Budget
- Gather Your Paperwork: first, you will want to collect all your relevant financial information. These include all your bills such as credit cards, car notes, and your mortgage (or rental expenses). Your income sources consist of pay stubs, W2 forms, savings account documents, bank statements, and other sources of income.
- Total Your Income: depending on your situation, your income can have several sources. Income includes wages earned from your job after taxes, child support, social security, and wages earned from freelance work or your own business.
- Total Your Expenses: your expenses include groceries, insurance, utilities, rent or mortgages, loans, childcare costs, hobbies, takeout, transportation expenses, and any other monthly costs. When calculating monthly expenses, there will be a variance as some costs such as gas and groceries can vary from month to month. Reviewing past bills can give you an idea of the average expenses for variable costs.
- Compare Income and Expense: once you have figures for your monthly earnings and expenses, you can directly compare the two figures. If your income exceeds your expenses, you are already at a good starting point for future financial planning such as investment, retirement, and reduction of existing debt. However, if your expenses are exceeding what your income changes, it will be needed to avoid growing debt such as credit cards.
- Make Changes If Needed: finally, if your income is not meeting your expenses, changes will have to be made. The first starting point for budget adjustments is reducing non-essential expenditures such as eating out or spending on your hobbies. However, in some situations, fixed expenses may have to be adjusted and drastic measures such as owning a less expensive car or finding a cheaper place to live may be needed.
Final Thoughts
Personal financing can be a complex topic and there are many areas to take into consideration. However, before you start thinking about stock investing, or renting out a property you own you need to have a solid base of information. A well-managed personal budget gives you a clear picture of your current financial status.
Resources:
https://www.practicalmoneyskills.com/learn/budgeting
https://www.consumer.gov/articles/1002-making-budget
https://current.com/blog/personal-finance-101/
