Your Financial Planning: 10 Tips to Make a Solid Budget

Posted on June 18, 2013 by Meinna Gwet

Does money seem to slip out of your pocket right even before you`ve earned it? Do you have a hard time keeping track of your finances? Does your credit card balance never seem to shrink regardless of the payments you make? If yes, then it’s high time to create a solid budget, or to improve your current one. Here are 10 indispensable tips to help you with your budgeting exercise.
1. Define your objectives: What do you want 5 to 10 years from now? Do you want to own a property, start a business or take a sabbatical and travel around the world? By identifying your short-term and long-term goals, you will be able to determine how much it will cost you to achieve them.

2. List your monthly expenses: On a spreadsheet, list all your recurring monthly expenses. Here is an example:

EXPENSES

RENT / MORTGAGE	$ 900.00
INTERNET	$ 45.00
PHONE BILL	$ 80.00
TV CABLE	$ 90.00
ELECTRICITY	$ 50.00
LOAN PAYMENT	$ 160.00
GYM REGISTRATION	$ 60.00
TOTAL	$ 1,385.00

3. List your sources of monthly income: In the same spreadsheet, enter what you earn after tax.

INCOME

PAYROLL AFTER TAX	$ 2,300.00
TUTORIAL SERVICES	$ 300.00
TOTAL	$ 2,600.00

4. Pay yourself first: Before going on a spending spree, determine how much you need to save every month to achieve your goals. You may have to reduce your recurring expenses if necessary (e.g. moving into a cheaper apartment or subscribing to a smaller cable package).

SAVINGS

TOTAL INCOME	$ 2,600.00
TOTAL EXPENSES	- $ 1,385.00
NET INCOME	$ 1,215.00
Less SAVINGS	-$ 500.00
TOTAL (Play Money)	$ 715.00

In the above example, Jane Doe has $715 left to spend every month after paying her regular monthly bills and allocating $500 to savings. You have to come up with a similar scheme and determine a limit, above which you would be living above your means (i.e. what is your $715?). This is a traditional way of making a budget. Now let’s look at additional tips to help you stick to your resolutions.
5. Set up a short-term savings plan: Plan upcoming big expenses ahead. Put money aside for trips, that new laptop you want or your holiday shopping. For that purpose, set up monthly automatic transfers to a savings account that you cannot cash out easily. For example, choose a savings account that is subject to a 48-hour delay on withdrawals. This will keep you from using that account for your regular transactions.
6. Set up a long-term savings plan: your long-run savings represent money you put aside to launch a business, to fund your children’s education or your retirement. Set up automatic transfers and invest the amount in an interest-bearing account like a mutual fund, a pension fund, a guaranteed investment fund or an ETF-brokerage account. Read investing your money wisely for a quick introduction to investing. The earlier you start, the richer you will get. For example, an amount as little as $250 invested at the end of each month at a 4% average annual return can accumulate to more than $36,000 in 10 years.
7. Keep your debt low…: Term loan payments like the ones on your mortgage, student loan, car loan and retail financing plan should be included in your recurring expenses until the amount owed is paid off. The faster you pay back a term loan, the sooner you will get rid of your debt.
8. …And your revolving debt even lower: Products like credit cards and lines of credit should be managed with caution, because contrary to term loans you still have access to the unused balance. Plus the interest you pay is usually so high that it may take years to repay the full balance by just making the minimum payments. So to avoid falling into a spiral, try to pay the full balance by the end of each month. Payments on revolving debt should come from your play money! Yes, the $715. This way, it forces you to adjust your lifestyle and spending habits as a function of your debt.
9. Plan for the unexpected: Sometimes sudden events get in the way of proper money management. For example, you may lose your job or incur an expense not covered by your insurance. For those kinds of scenarios, you need to contribute a fixed amount every month to an emergency account.
10. Use available tools to track your finances. In addition to spreadsheets, mobile applications like Mint, BillTracker or Expensify can help you track your finances easily. So have fun with your budget and don’t be afraid to try out new tools.

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