Wednesday, February 10, 2010

Financial Health 101: Develop a Budget

Whether you watch Morning News programs or listen to well received financial advice programs like Crown Financial Radio show, you have heard so much about the tons of debt, both secured and unsecured debt.
Frequently, the topic is a couple or individual who apparently has made many poor financial decisions.

You no doubt noted that I said "apparently" and "made" these financial decisions.   First, the couple or individual made the decision to take on the debt whether it was a pay day loan or a reverse amoritization loan.  Secondly, apparently these were bad decisions.  With the right information, these finance decisions could have been great decisions.

The "bad" of the decision is frequently that the couple/individual had no idea of what terms or conditions of a loan would be acceptable to their financial well-being.  There is much that goes into this understanding.

Yet, the most important 1st step in to understanding the decisions that will benefit one's financial well being is
a BUDGET.   A budget, by definition, is simply a document or spreadsheet that lists one's income and one's expenses to align the income with the expenses so that standard savings are set aside each period(typically a month).  Budgets are not scary or difficult to establish but they can be very eye opening as relates to:

   *  Spending Habits
   *  Income deficiencies
   *  Savings
   *  Infrequent Expenses that catch one by surprise
   *  Compromises Required so Income exceeds Expenses

To set a budget, one must track his/her/their expenses for 30 to 60 days.  To do this, you must break down the expenses to very precise income and expense categories like Food, Paper Goods and Medicine, for example.  This is required so that your trip to Wal-Mart, Sams, Target or other mass retailer can be broken out so that you can see if you spend $600 per month for food or it is really $400 for food, $100 for Medicines and $100 for Paper Goods.  You should only really need to track to this level of detail only for this 30 to 60 day period unless you always have a situation like noted above were there is a huge difference on how that $600 breaks up.

Once you tracked the expenses and reconciled the expenses so they are reduced, adjusted, ect so that they income will exceed these expenses, you need to write out the budget so that all parties contributing income and/or spending the income will know how much is allocated now to spend and how much must be saved for Infrequent Expenses like Car Insurance, Doctor Visits, ect.  The budget must be tracked monthly so that
modifications and updates can be met.

The budget is a "living, breathing" entity as your or my situations changes from time to time thus we need to update our spending plan to ensure the budget is tight.  Saving money is key as every one should have a minimum of 3 months salary(s) saved and a preferred 6 months of salary in savings. 

With a budget, it is possible for you to set yourself up for an improved finacial future.

Ask questions or check back for futher updates on improving your finances.
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