| Establishing Your Monthly & Annual Budget |
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Budgeting is a necessary part of financial
independence. Oftentimes, bankruptcies are filed due to
overspending, poor planning, and a lack of budgeting. Keeping
track of your net income, and monthly and annual expenses, can help
prevent overspending, and possibly keep you out of the financial
difficulties associated with filing for bankruptcy. Simple
budgeting may even allow you to avoid bankruptcy altogether! The
key to avoiding overspending is not to make credit, or credit card
purchases at all, unless it is truly an emergency. Due to added
charges, fees, and interest rates, consider that credit based expenses
actually cost you more than the original value of any good or
service that you obtain in this manner. |
| If you have already filed for bankruptcy, then budgeting
is absolutely essential! While still in bankruptcy, or even if
your case has been discharged but is still being reported on your credit
history report, you will want to avoid the same kinds of problems that
caused you to file bankruptcy in the first place. Also, if you
have filed for chapter 13 bankruptcy, in which all excess income not
being used for living expenses is being taken to pay off creditors, it
is necessary to know how to spend less and avoid accruing more
debt. You would not want to finish paying off a 5 year bankruptcy
and have your case discharged, only to then find yourself in the exact
same, or worse situation as before! |
| The idea behind making a budget is to find out how
much your income actually is and where your money is actually
going. You will find several simple steps to creating a
monthly/annual budget below. You will need approximately 5 sheets
of paper (per month) and something to write with. It is important
to note that credit cards should not be listed as part of your income,
but rather they should be listed as an expense, since they have to be
paid back and include interest. |
| Step 1: The Income Record |
| Before you can begin deciding how much of your
money should go where, you first need to know how much your monthly
net income is. Net income is the amount of money you make
after taxes and other deductions. Title the first sheet of
paper "Income Record". Below the title, insert a
table with 4 columns that will show source of income on the
left, pay period (i.e. biweekly, twice a month, once a month,
weekly) in the center, and amount of net income each pay period
in the right column. Be sure to include all income
you receive in a month, not just salaries and wages from your
job, i.e. income from stocks, alimony, child support,
retirement, government assistance, etc. Please note,
you should NOT include money spent on credit cards as income,
since you have to pay that back, including fees and interest
rates. If you do not
receive the same amount each pay period, then average the
previous 3 or 4 months income from that source. In a
column 4, multiply your net income (column 3) by the pay period
(column 2) to find out how much you make from each source in a
month. Below the table, add up the amounts in column 4 to
find your total monthly net income. This is the amount you
have to work with...or within a month. |
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| Step 2: The Expense Record |
| The remaining 4 sheets of paper will be used to
keep track of your monthly expenses on a weekly basis (i.e. 1
sheet of paper per week, per month). These should be title
"Expenses Record". It would probably be a good
idea to include the name of the month and week number; ex. March,
Week 2. This will allow you to recognized spending
patterns that may be associated with particular times of the
month or year, for example: paying bills or Christmas
shopping. Again, you will need to insert a table, however,
allow yourself plenty of room to make notes in the boxes.
You should have a column for each day of the week. It may
be easier to turn the sheet of paper long-ways to give you more
room. The rows should be categorized by your daily
expenses. For example, you may use the following
categories: necessary living expenses (i.e. utilities,
groceries, rent or mortgage payments), other bills (i.e.
medical, dental, car), and other miscellaneous (i.e.
magazine/newspaper subscriptions, entertainment, shopping,
etc.) Please note, though, that you certainly are not
limited to using only these categories. Use as many as are
necessary for you. |
| You will want to record all of your daily
expenses in these boxes. Make sure that you list the items
(unless it is a lengthy list, such as groceries, in which case
"groceries" should suffice) and amount you paid in
cash or cash equivalent (i.e. ATM, debit card, check or
automatic bank withdrawal). Again, please note that you
should NOT list credit based
purchases, as this will falsely represent your actual daily and
monthly expenditures some. However,
when you make credit payments, you should list that under
expenditures. Tip: This is much easier to keep
track of if you have your weekly sheet with you at all
times. That way you can record a purchase at the time of
the transaction, thereby preventing the possibility of
forgetting it and leaving it out of your budget! |
| As with the previous income table, leave yourself
some room to total up each column at the bottom of the
chart. While it is good to see the individual breakdown
and cost analysis of your expenditures, having a total will
allow you to see what percentage of your income is going to each
category. |
| Step 3: Compare the Records |
| After having kept track of your income and
expenses for about 2 or 3 months, compare the 2 records.
If you find that you are spending more money than you would like
to in one area, and are not spending as much as you need to in
another area, you now have the numbers in front of you to move
around a bit. By knowing how much you have to spend and
what you average in each category, you can begin to allocate a
certain amount of your net income each month to the different
categories. That allows you some room to move within each
category, as well. If, for example, you need to cut back
on entertainment spending, then you simply do not allow yourself
the same amount that you have spent in the past. In this
way, you can also set aside a little for savings every month, as
well. It is always good to have something to fall back on,
just in case. No one can ever predict those costly,
unforeseen events of life, such as car accidents, lay-offs, etc. |
| Step 4: The Annual Budget |
| The annual budget is basically just the monthly
budget multiplied by 12. If your monthly budget is not
always the same, simply add up the previous 12 months to find
your annual income and expenditures. You can reallocate
your spending on an annual basis in the same manner that you
would on a monthly basis. For example, if you decided that
you wanted to put 15% of your annual income into savings, you
would only have to multiply your annual income by 0.15 to find
how much you want to save. You can then reallocate your
spending for the year. The only difference between the
annual and the monthly budget is that you should leave room to
include those once-or-twice-a-year kinds of expenditures, i.e.
insurance, taxes, vehicle registration, etc. That is why
it is important to have an annual and a monthly budget.
This way, you can tailor each month's expenditure spending to
fit your needs that month. |
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