Professional money managers know the key to obtaining financial freedom is the creation of a budget plan that maximizes your money. Why is budgeting so crucial to your financial success? Quite simply, to avoid debt negotiation and settlement, a detailed budget permits you to manage your money effectively by tracking your spending on a daily, weekly, and/or monthly basis, thereby allowing you to establish an affordable lifestyle and set goals for future growth.
Now, let’s review the steps which will allow you to easily create a comprehensive, effectual Annual Budget Plan based on your monthly income and expenses. Start by organizing your expenses into the following categories: fixed, flexible and discretionary.
Fixed expenses represent necessities whose monthly amounts typically are unchanged, such as a mortgage or rent, vehicle loan or lease payment, and insurance. Credit card payments may also be considered a fixed expense since the minimum payments usually remain the same each month.
Flexible expenses consist of all the items that you can control or substitute for a less expensive alternative. Examples include groceries, utilities and medical bills.
Discretionary expenses are all those non-essentials that are not required for your day-to-day survival such as magazine subscriptions, Cable or Satellite TV, or that daily cup of specialty coffee.
Once you have identified all your expenses and earnings, it’s time for some math. Subtract your total expenses from your income. Needless to say, your overall goal is to make more money than you spend. If your income exceeds your expenses, this amount is known as Residual or Disposable Income. You may then create a plan to allocate those funds toward a savings plan, luxury spending or paying off your debts faster.
Begin by setting your financial goals. It is very important to determine these objectives so you can adjust your budget plan accordingly. Perhaps you need to save for a new car, or college expenses, or a down payment for a house, or a vacation.
Now identify how much money will be required to fulfill your goals and over what length of time.
Minimally, you want your earnings and expenses to be equal. By doing so, you have created a financial plan that accounts for all your needs and should be easy for you to maintain. If your expenses surpass your income resulting in a shortfall, or you want to increase your savings, it’s time to make some cuts in your spending. As a rule of thumb, you should initially consider reducing your discretionary or non-essential expenses. If these cuts are insufficient to save for your goals, then review your flexible expenses and adjust those controllable items to accomplish your monthly savings target.
Once you are able to trim expenses and reach this targeted amount, from that point forward deposit these funds into an interest-bearing savings account every month until you have achieved the financial goals upon which your budget plan was based.
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