| 1. KEEP IT SIMPLE (AT FIRST)
The best way to get started is to put together a very basic
list of your monthly income (i.e. your paycheck) and expenses.
Just give it your best guess. Stick to listing things you
can easily identify: rent, car payment, insurance, utilities
(you get the picture). As time goes by you can add more detail.
2. DETERMINE YOUR MONTHLY INCOME (after tax how
much can you spend)
To be effective, you must determine how much you make each
month. This is not as straightforward as it seems. If you
get paid once a month, it's easy -- just use the amount from
the check. If you get paid on a different schedule use the
chart below:
Monthly Salary Calculation |
Payment Interval |
Multiply By |
Divide By |
each week |
52 |
12 |
every 2 weeks |
26 |
12 |
twice a month |
24 |
12 |
every 3 weeks |
34 |
12 |
If you have other sources of income other than your paycheck
that you use for expenses each month (i.e. interest income,
alimony, child support, other), you will want to include these
sources as well. You can use the chart above to determine
the monthly income from these sources as well.
3. EXPENSES
This will be the difficult part. It will be more difficult
than income sources because you will have many more expenses
than incomes (if you do have more sources of income, than
you probably have enough money to hire your own personal accountant
and shouldn't be wasting your time with my site). You will
also most likely have hidden expenses or expenses you currently
do not realize exist. Group these expenses into categories
as best you can -- you can always re-categorize later. Just
prepare your list for now, don't worry about estimating the
amount spent each month.
4. RECORDING REVENUES AND EXPENSES IN PERIOD INCURRED
You need to select your time period. I suggest selecting a
month (I have been referring to the month time period throughout
this site). You need to match all your revenues for one month
against all your expenses. Don't record an expense to the
proper month based on in which month you paid the bill, but
rather record the expense in the month that reflects when
the expense was incurred. Here's an example of what I am talking
about. Let's say you get your electric bill on the 23rd of
each month and it is not due until the 3rd of the following
month. Let's also say in June you pay the bill early (on the
23rd), but the July bill (which comes on July 23) you don't
pay until August 3. If you recorded your expense based on
the date paid, you would not have any electricity expense
recorded in July (since the June bill was paid on June 23
and recorded in June, and the July paid was paid August 3
and recorded with August expenses). By matching revenues and
expense to the period in which they occurred, you will be
able to determine if your monthly expenses exceed your monthly
income.
5. ESTABLISH ESTIMATES FOR MONTHLY EXPENSES
Make your best guess for some those items that are not reoccurring.
It may take you a couple of months to get good at estimating
the more difficult expense categories. If you find you have
a large amount of money in any one category, consider breaking
it down into more detail. Utilities is a good example. You
may want to break it down into: (1) Electricity, (2) Gas,
and (3) Water/Sewer.
6. TRACKING ACTUAL EXPENSES
You need to keep track of your actual expenses incurred during
the month and group them into these categories. It will be
easy for things like rent, phone (stuff you get a bill for
and write one check). The tough part will be those cash expenses
(lunches, sodas, beers after work, movies, etc.). If you don't
have a memory like a steel trap, carry a small pocket size
note book with you and write them down as they are incurred.
Or if you find that to be a big pain, you can take the easy,
but much less accurate, way out and each time you withdraw
cash, guess which categories these cash expenses will fit
into and record them. You can always adjust them later. This
way, you will at least have something recorded and are less
likely to forget that $5 purchase of lottery tickets the other
night.
7. AUTOMATE THE PROCESS
You are welcome to download my budgeting software for free
from the download page to help you keep track of all of this
data each month. Having information in the computer is helpful
for analysis purposes as well.
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