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How to Set a Budget

Woman Working on Home Budget

Before you can effectively set a budget, you must determine your monthly expenses and other financial obligations (which might include anything from extra money for tipping a nanny or babysitter to assisting an elderly or college-age family member with additional money for groceries). Once you know the amount of money you owe and to whom you owe it, you can better prioritize your bills and set a budget that allows you to pay all your creditors accordingly – and, most importantly, on time.

Organize Bills, Debts and Other Financial Obligations

To get started, gather your bills and place them on a clear table or open space in front of you. Place the bills – including biweekly, weekly, monthly and annual payments – in order by company or type of service. For example, if you own both a landline and a cellular phone, you may want to group these two services together. If both services are payable to the same company – such as a “service bundle package” – grouping them together may make setting the budget easier. At best, doing this will eliminate the potential for a gross oversight, which could cost you in fees if bills go unpaid.

Now that your bills are organized, examine the number of creditors you have and services to which you are currently subscribed. Be aware of any bills that are marked as “past due,” “in collections,” or are simply noted as being in jeopardy of suspension for nonpayment. Place these particular bills in a stack off to the side and put the rest in descending order of importance.

If you need to cut expenses, you can begin determining which nonpriority expenses can be paid off and then cancelled so you can begin focusing your attention on high-priority expenses such as rent, food and health care.

Creating an Effective Budget

The key to setting an effective budget is knowing how much debt you owe, how much money you need to eliminate the debt you owe, and how much money you need to live comfortably while you are simultaneously saving for a future rainy day.

As you review your bills, you want to look for trends. For example, if over a six-month period, your family typically spent $720 dollars per month in groceries, create a budget around this figure. You can discover ways to bring this figure down later, but for now, focus on finding the most reasonable spending trends or patterns for you and your family. If $720 right now seems like a reasonable food allowance for you and your family, start there and work your way down. You don’t want to set yourself and your budget on the road to failure.

Instead of focusing on cutting priority expenses, such as food and clothing, focus on cutting nonpriority expenses such as entertainment, magazine subscriptions, cable, extra calling features on a home or cellular phone, Internet service and movie rentals. You can always add these expenses to the budget later. And keep in mind, there are ways you can enjoy many of these things for free, such as by utilizing your local library, which likely offers not only your favorite publications, but also free movie rentals and free limited Internet access for local residents.