Before You Start: Test Your Budgeting Knowledge
We invite you to take this optional pre-quiz so that you can gauge your current understanding of budgeting. When you reach the end of this course, take the post-quiz to compare your scores and receive a Document of Achievement.
This course is free and is open to the public without any need to register. Participating in the Pre and Post Quiz, in order to receive your Document of Achievement, is completely optional and requires you to provide your name and email.
Let’s jump right in. When you need to change your life and get control of your finances, you need to start right away. Your first step is to stop incurring new debt. If you’re ever going to get out of the hole, you have to stop digging right now. From now on, you should strive to live on a cash basis; get used to paying cash for things whenever you can.
As we proceed, remember that budgeting is an ongoing process; you may stumble at first. Just take it one day at a time and stick with it. Keep adjusting your budget until you come up with something you can live with. We’ve helped countless thousands of people just like you to work their way out of debt. We know you can do it too.
Track your spending
Before you create your first budget, you need to track your spending. You should track for a full month before you construct a new budget. If you don’t, you won’t know what your monthly expenses are. We also suggest that you keep tracking after you establish a budget to make sure you are sticking to your plan.
There are many ways you can track your spending. You can record your spending on a daily calendar, you can carry a notebook with you and jot down everything you spend, you could just keep all of your receipts and sort them out later, or you can also use a computer to track your spending. Either use software like Quicken or check out a free web service like Mint.com.
You should track your spending for a full month before you construct a new budget. However you choose to track your spending, it’s important that you track everything and stick with it. That means every time you put 50 cents into a vending machine, you need to track it somewhere. If you’re going to plug your budget leaks, you need to know where every dollar is going.
Our budget sheets suggest many categories for tracking your expenses, including housing, which should include your mortgage payment or rent, property taxes, utility bills and any other expenses directly tied to your home. Another category is automotive expenses, which should include gas, insurance, repairs, and DMV registration as well as your car payments. Your food budget should include groceries and dining out, plus things like snacks and pet food. Include as many categories as you need to. Cover all of your expenses, including medical, retail shopping, entertainment, taxes, savings and gifts.
If you track your spending carefully, we guarantee you will learn new things about yourself. Tracking alone can show you things you didn’t know about where your money is going. Once you’ve tracked your expenses, you’ll have important information you need to construct a new, more effective budget.
Calculate your income
You’ll need to know how much money you have coming in before you can budget it. We usually think of tracking income as a pretty easy task. Most of us have a regular paycheck that comes in the same amounts every week or two weeks.
But it’s important to include all of your sources of income when you track. Do you rent a room in your home? Does anyone owe you money? Our ebooks and tracking sheets have some suggested categories.
We can also help you find additional sources of income if you come up short. Garage sales are a good way to make some extra income while getting your home organized.
We want to stress that alternate sources of money like tax refunds are treated as income. Too many people act like they’ve won the lottery and waste their tax refund check on frivolous spending. When you get money, no matter where it comes from, you should include it in your budget and apply it to your expenses, debt payments, and goals.
After you’ve calculated your income, and tracked your spending, it’s time to think about what your financial goals are. Why are you thinking of creating a budget in the first place?
Eliminating your credit card balances and other debts are good goals to have. Goals will take time to achieve.
You’ll want to think about when you hope to complete your goal saving so you know how much to set aside. Most of the people we counsel are trying to eliminate their credit card and other debts. This is a good goal for most consumers to include in their budgets.
You might also save for a car or a home. Many people who are striving to eliminate debt from their lives will try to save up enough money to buy a car outright. If you plan to apply for an auto loan to buy your next car, you should consider saving up a down payment. The larger the down payment you make, the better your interest rate will be, and that will mean lower car payments and big savings over time. We divide goals into three different categories by time:
Short term goals are those that can be accomplished within one year. Buying a new television or computer, or perhaps saving for a family vacation might be good short-term goals that you could achieve in 12 months or less.
Medium range goals take up to 5 years to achieve. Saving for a new car might be a good mid-range goal.
Long-term goals take 5 years or more to achieve. Saving for a college education or a new home are common long term goals. A crucial long-term goal is to save for retirement. That’s a goal you’ll probably be working towards for most of your lifetime.
Add it up
After you calculate your income and expenses, then you will add everything up to create your final budget. Add your debt payments, in addition to the amount you want to save each month to meet your goals.
Discretionary expenses, or wants, are the first items you should look to make cuts if your budget doesn’t balance. Balance your budget by subtracting your total expenses from your net income income.
At this point, you will know if you are at a deficit or at a surplus. If you are in a deficit, you will need to find areas to cut or reduce your expenses or look at ways in which you can increase your income. Some of our materials here in the FIT Academy have helpful suggestions, or you could contact us for a free counseling session.
Our budgeting charts divide expenses into two categories: necessary and discretionary. In other words, Needs and Wants. Discretionary expenses, or wants, are the first items you should look to make cuts if your budget doesn’t balance. We can’t give you exact guidelines because everyone’s budget is different, but here’s a general idea of how your spending should break down:
- Housing should be around 35% to 45% of your budget.
- Auto and transportation budget should be 15% to 25%.
- Monthly utility bills should be 8% to 15% of your budget.
- Food expenses should be 10% to 20% of your monthly budget.
- Medical expenses should be 8% to 15% of your budget.
- Clothing and accessories shouldn’t exceed 3% to 5% of your monthly expenses.
- Savings are a crucial part of your budget. You should strive to save as much as possible for emergencies, retirement, and other goals. For now, set aside 5% to 10% of your budget for savings, but eventually you should try to save as much as 20%.
- Miscellaneous expenses should be 5% to 10% of your budget every month. This is a big category for most people, so you’ll probably have to make some cuts here to balance your budget.
- Up to 20% of your monthly budget can be set aside for debt payments, not including your auto loan or mortgage. This category will involve credit cards for most people. If your debt payments are taking up more than 20%, you may have a problem that needs more serious help.
Receive Your Document of Achievement
Congratulations. If you have reached this point, you have successfully completed our Budgeting 101 course. Our hope is that you begin to implement what you have learned immediately to insure your ongoing success.
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