Budgeting Finances

Budgeting Finances is a powerful fourth step in establishing a strong financial plan.

A responsible financial plan requires that you make informed choices on what you can afford, and what you can’t.

Fixed vs. Variable Budget Costs
Fixed costs are those that you (currently) have no control over.

For example, your house (or apartment cost) is a fixed cost. Also, you have a car payment, cell phone bill that is commonly fixed.

Variable costs are those that you have some control over. Food, electricity, entertainment, savings and miscellaneous are all variable costs.

For example, you can adjust your thermostat to lower your electric bill. And, you can spend less on entertainment to save money there. There are many other ways to reduce your monthly budget.

To define your Budgeting Finances start with defining your expenses. Below is an example of Expenses (from the Income and Expenses page). You can see which costs are fixed, and which are variable.

Income and Expenses Chart

Put in your average A/C and heating costs. An easy way to do this is to get out your bills for the past year. If you can’t find your bills, look up what you paid with your checking account (or however you paid for them).

Add your January though December bills and divide by 12 to get your average monthly energy bill.

Note: In the long run almost everything is variable even for the so called fixed costs. For example, you may be able to lower your monthly house payments if you refinance.

Another way to reduce costs would be to eliminate your home phone and only use your cell phone. There are many other ways to reduce costs as well.

In some cases you may want to pay more on certain bills. If your interest rates are high on a credit card or other loan you may decide to make higher payments. This has two benefits:

• To pay them off the bill sooner and eliminate that monthly payment
• Whatever extra you are paying is saving that high interest rate!

Defining Needs vs. Desires
To define your needs vs. desires first review your expenses (from the Income and Expenses sheet. Determine which of these items is essential and which isn’t.

For example, you need to pay your house payment (or you won’t have a place to live), and pay your car payment (if you have one) or you won’t have a vehicle for long.

A desire is an expensive vacation (even if you deserve one!), or a higher budget for entertainment than you can realistically afford. Once you have determined needs vs desires you can set your priorities.

Setting Priorities when Budgeting Finances
What are your financial priorities? Most people don’t have the luxury of doing everything. However, there are ways of stretching your hard earned dollars. Here are a few common questions to ask:

• Do you want or need a new car this year, or will your current vehicle be fine?
• Could you spend less on entertainment this year?
• Can you save money on your vacation, by being careful with your dollars?

Defining your priorities will help you determine what expenses per month to budget for depending on your income. Even being on a budget has some flexibility.

Stretching Your Dollars
By investing time researching and finding the best deals, you can do more than what first blush at your budgeting finances may show.

For example, if you want to go on vacation during the year, you may cut costs with your air conditioning and heating by changing your thermostat accordingly. And, you may lower your monthly entertainment budget to save more for your vacation.

When you shop for food, consider being flexible and buying sale items (that you will need for anyway) but may not be on your current weekly grocery list. There are many other ways to stretch your dollar when budgeting finances.

Next Steps
Now that you have a general understanding of Steps 1 thru 5 for sound Financial Planning. It is time to take action!

For money saving ideas and more Financial Planning Techniques please see the navigation bar on the left of this page.

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