Financial health starts with a solid budget.

The benefits of creating a budget and sticking to it cannot be underestimated! Certainly many people do not enjoy setting a budget or may even find it difficult. However, there are numerous short-term and long-term benefits to budgeting that make the effort (and the difficulties) worth it!

Sticking to a budget makes sure that you’re in control of your finances. Follow these 5 steps to create a solid budget:

Step 1: Calculate your income.

Calculate your income including your paycheck, income from a second job, child or spousal support payments, retirement income, social security benefits, pension income, or any other source of income, like sales from an Etsy store.

Be mindful to include all sources of income, including sources that may not come in on a regular schedule, such as book royalties.

Step 2: Calculate your expenses.

First you must know exactly how much money you spend each month.

  • List your fixed monthly bills first. These include your mortgage or rent, car payment, insurance, student loans, utilities, cable, phone, and other regularly occurring monthly bills.
  • List your expenses that vary month to month. These include food, gas, and entertainment expenses.
  • List your expenses that occur throughout the year. These include property tax, car maintenance, tag renewal, birthday and holiday gifts for family and friends, etc.

To calculate your monthly expenses add up the above. Divide your large expenses that occur throughout the year by 12 to know how much to include in your monthly expenses.

For the truest picture of your monthly expenses, add up all that you’ve spent for the last six to 12 months. Then divide by the number of months you added together. This will give you an average for your monthly expenses.

Step 3: Take an honest look at your income minus expenses.

Subtract your monthly expenses from your income.

If the number is positive, that is the money you are able to save each month. If the number is negative, you are spending more than you earn and it is time to seriously consider how to reduce your expenses.

This is a great opportunity to review your expenses with a critical eye and find places where you can trim. Maybe you don’t need your cable TV because you have a subscription to Netflix or Amazon Prime streaming video. Perhaps you can make coffee and your lunch at home and forego the $5.00 morning latte and $10.00 take-out lunch. Over time little trims can add up to big savings.

Step 4: Set realistic goals.

Set realistic savings goals (or debt payoff goals!). If you are already earning more than you spend, keep it up! Now that you know your income minus expenses, you know how much you can save each month, and how much you can save over a year. Also, take a look at your expenses and see where you can trim so that you can reach your savings goals even sooner.

If you are spending more than you earn and carrying credit card debt forward, this is your opportunity to take control of your expenses.

The general rule of thumb is to have at least six months in savings as an emergency fund. From there, set realistic short and long-term savings goals.

Step 5: Record spending, track progress.

Stick to your budget. After going through all of the above steps, do not let your efforts go to waste!

To stay on budget record all of your expenses and income. You can do this by hand, in a simple Excel spreadsheet, or you can download a fancy app. It does not matter what tracking method you use – it only matters that you track. This is a tenet of financial health. Plus, it is especially satisfying to track your finances when you are moving closer to your financial goals.

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If you’re deep in debt, have fallen behind on payments, and your credit card debt is mounting, it is time to take back control of your finances.  Take an honest look at your situation. It may be time to explore all of your debt relief options, including bankruptcy.

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