Budgeting in Six Easy Steps

Creating and sticking to a personal budget is a vital part of personal financial planning.

Consumer Credit Counseling Service of Greater Washington offers an easy, six-step method for arriving at a budget you can live with:

Step 1
Determine your monthly income. Take into consideration your payroll deductions (health insurance or other group benefits, income taxes, union dues, pension) and other sources of income.

Add together all income, less deductions. On a piece of paper record the resulting figure as "value a."

Step 2
List your "fixed" and "variable" monthly expenses, such as housing, utilities, food and transportation. Remember to allocate funds for clothing, medical care, child care, personal expenses, recreation and emergencies/repairs.

Break down your annual, semi-annual and quarterly expenses (taxes, insurance) into a monthly figure that can be put aside and withdrawn when these bills become due. Example: car insurance that is $150 every six months needs $25 per month set aside. You will earn interest on these funds and will have no problems meeting all other expenses in the months these become payable.

Remember not to duplicate expenses that may already be deducted from your paycheck.

Add all of your expenses - this is "value b."

Step 3
The next step is to find your "discretionary income" by subtracting your total expenses (b) from your total net income (a). Write this number down on a piece of paper as "value c."

Step 4
List all unsecured debts (credit cards etc.), the monthly payments and the balances. If you don't know your exact debt amount, now is the time to determine it.

Record your monthly total as "value d" and continue with the next step.

Step 5
Some of your discretionary income is committed to the installment debt listed above. Step 5 is to determine if you have any remaining discretionary income after making these installment payments by subtracting your total monthly payments to creditors (d) from your discretionary income (c).

If this figure is a negative number, you are not ready for Step 6 - Setting Goals. Consult a personal financial counsellor and work on getting this figure into the positive numbers.

Step 6
It is now time to establish short and long-term goals. Make a list of these goals, using these examples to help you get started.

• Long Term - real estate purchases, future education, retirement
• Short Term - home improvements, new car, travel
• Other Desired Investments - stocks, bonds, CDs, mutual funds
  

Once you have made a list, determine how much you need to save monthly by dividing the amount of money required to meet each goal by the number of months that you have available to save for it.