The one tool that has the largest impact in transforming your financial situation from one of debt to one of financial stability is creating a budget.
If you’re not quite sold on the importance of having a budget, you should read the article Getting out of Debt: Why Budgets are Important. If you already understand how a budget can transform your financial picture, it’s time to begin the budget creating process.
Before you start, take a deep breath and relax. This may be the first time you are taking a serious look at your finances. If you are deep in debt, the damage is already done. There is no need to be nervous or uptight about creating a budget. Pat yourself on the back because you’re taking the first steps towards getting out of debt and improving your financial standing. You will also learn a lot about yourself and your family during the process.
Budget Creation Prep Work
As mentioned in “Getting out of Debt: Why Budgets are Important,” a budget is a financial road map. As with any road map, the only way to use it is to plot the “Start Here” and the “Destination” points and draw a line from one to the other.
The preparatory work for creating a budget is to gather the “Start Here” information. The more accurate your starting information, the better your budget will work for you.
To create the beginning point you must track your expenditures. The budget won’t work if you put in “what you believe you spend” in any category. You must take the time to find out what you actually spend. One of the best ways to track your expenditures is to take advantage of technology, whether it’s your own money management software such as Quicken or the bank’s online banking software.
Tracking Your Expenditures Electronically
The easiest way to track your expenses using software is to set one account as your base account (preferably a checking account). When you get paid, deposit your money in that account. For the next 30 days you will use your bank’s debit card or write checks for all purchases (yes, use your debit card to purchase a pack of gum too). By doing this, you create an online record of your expenditures.
Tracking Your Expenditures on Paper
If you’re not comfortable using software programs or your bank’s online banking software, you can always track your expenditures on paper. You should carry around a small notepad, small enough to fit in your pocket, and jot down everything you purchase. For 30 days the notebook is to be your constant companion.
Track Expenditures Honestly
During the 30-day budget creation prep time, you are only to track the expenditures. Refrain from “pulling in the belt” in an attempt to reduce your expenditures. You want to get a true picture. Additionally, try not to spend too much time reviewing your expenditures until the end of the 30-day period.
If you are creating a family budget, everyone in the family must complete the 30-day budget prep work. This exercise is a valuable learning tool for children and adults. Once you have made it through the 30-day expenditure tracking, it’s finally time to create the budget.