Fred Harteis News Articles - Personal Budgeting: Establishing a Budget

Fred Harteis News Articles- Many of us fail to see the relationship between budgeting and saving. Budgeting is a process that starts by setting spending targets that help you to stay within your means of paying for the bills. A personal budget is useful in controlling personal expenses.

Reasons for having a personal budget usually change over time. In our 20s, we focus on repaying debts or saving for a down payment on a home. We may want to budget in order to set aside several thousand dollars for a trip around the world. In our 30s and 40s, budgeting is important to help pay for our children's living and college expenses. By the time we enter our 50s, saving for retirement becomes a major financial goal.

Some important steps in setting up a personal budget include:

Select a period to measure. A monthly budget often works best. Most of us pay our rent, mortgage, and utility bills monthly. It is also the period over which many of us get paid. If you are paid every two weeks, you can add the amounts to determine a monthly figure.

Calculate net cash flow for the period. Your personal net cash flow subtracts your cash expenses (cash outflows) from you cash income (cash inflows). If you charge with your credit card, add those charges to your cash expenses. Using your credit card is only a means of postponing cash outflows. While you're at it, be sure to add the little items, like those $4 lattes and video store trips. These items easily add up to $100 or more in a month.

Keep records. Accurate records will help you to keep a history of several budgeting periods. You can string together 12 months of budgets to create an annual budget. You can use your budget records to compare actual and budgeted spending. The differences in actual and budgeted spending are called variances. Be as precise in your record keeping as you can afford to be.

Monitor and review. Your records help you to compare how well you budget. The key is to identify positive budget variances—where your actual cash outflows are less than your budgeted cash outflows. These variances are a source of funds to save and invest. For example, if you budget $1,500 in monthly cash outflows but routinely only have cash outflows of $1,400, you have identified a source of savings worth $100 a month.

Save for an emergency fund. As you gradually find you can save each month, you may want to first set aside enough for an emergency fund. An emergency fund consists of three to six months of savings. An emergency fund is also called a rainy-day fund and should be used only to pay for unanticipated financial setbacks. These setbacks may include losing a job, becoming ill, or suffering the death of a family member.

Invest regularly. A personal budget may have led you to identify a way to save $100 a month. Investing this extra $100 every month lets you take advantage of dollar-cost averaging. Dollar-cost averaging is a basic principle of investing. Studies consistently show that, over time, dollar-cost averaging buys shares at a cheaper price than if you attempt to time your purchases. In addition, your regular contributions fuel the compounded growth of your investments.

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About Fred Harteis: Fred Harteis leads Harteis International. Fred Harteis has a background in agriculture and has created many successful business ventures.