Though they may not be fun to create, budgets are a
necessary evil if you want to get your spending under
control. And the key to successful budgeting is spending
less than you earn.
A cash flow analysis is the first step in determining
whether or not your spending is "out of control" and
if you need to create a budget to rein it in. A successful
budget will give you greater control of your money and
help keep you on track to reaching your financial goals.
Evaluate Your Spending
Your cash flow analysis shows how you spend money on
a daily and monthly basis. To determine your cash flow,
- Track your spending for several weeks. Record every
dime you spend--both how much and what it was for. Don't
just record withdrawals for cash--record what that cash
was spent on. You should be able to account for everything.
- Gather receipts. Organize the receipts for all
of the expenses you've been tracking. Be sure to include
your credit card bills and checkbook register for the last
- Total your monthly income and expenses. Begin to
add up all of your tracked expenses as well as your monthly
Create Your Budget
Your cash flow analysis will show you if you are spending
more than you are earning and what expenses you may have to
cut back on and budget for more carefully. To get started,
you will need to prepare an accurate account of your monthly
income and expenses.
When you are ready with that information, follow these easy
- List your pre-tax monthly income. This includes
salary, investment income, etc.
- List and subtotal your monthly expenses--fixed
and variable--in the following categories:
- Combined taxes. Your federal, state and social
security taxes withheld every month.
- Housing. Your mortgage, rent, association dues,
- Home care. Include cleaning, landscaping, repairs,
- Food. Include your groceries, dinners out and
all other food expenses.
- Auto. Monthly payments for your car loan or
lease, insurance, maintenance, parking, gas, and other
expenses you might have.
- Insurance. List premiums for your health, disability,
life, and any other insurance policies. If you pay quarterly
premiums, then divide by three to get a monthly figure.
- Education. Any tuition you currently for your
child or yourself as well as any student loans, etc.
- Personal Care. This includes clothing, cosmetics,
gym, entertainment, vacation, gifts, etc.
- Total and compare the income and expenses columns.
- Positive cash flow: Do you have money left
over? Then you're spending less than you make and are
in good shape. You could apply the extra money to one
of your credit cards or other debts. And if you still
have money left over, you should consider increasing
- Negative cash flow: If your expenses are more
than your income, you should create a budget to cut
back on your variable expenses. Remember, the key is
to always spend less than you earn. If you can't find
ways to cut expenses, then you'll need to step back
and really evaluate what you currently view as "necessities."
They may be luxuries in disguise that you can live without.