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How to Create a Budget – Step One in Personal Finance 101

In today’s lesson you will learn how to create a budget which is step one in personal finance 101. But before we discuss that, let’s first dive into the principles of money and finance.

When it comes to learning about money and finance, it very simply comes down to knowing how to manage your money. And the best way to manage your money is to learn how to create a budget – which should be your first step when learning how to manage your finances.

How to Manage your Money

When you think about it, managing your money is the same thing as managing your health – It basically comes down to nothing more than just basic common sense. For example:

how to create a budgetOne reason why so many people suffer from such poor health is because the major portion of their diet includes empty calories e.g. excess consumption of sugary foods. The common sense solution is to reduce the amount of empty calories in your diet, and replace it with a diet that is filled with nutrition rich whole foods – essential macro and micro nutrients. In a similar sense, most people get into financial trouble because they have a spending problem – they spend their money in excess on non-essential items such as entertainment and electronic gadgets, for example. The common sense solution is to reduce the amount wasteful spending.

So in keeping with this common sense approach, you just need to use a common sense solution to managing your finances. This common sense solution begins with simply knowing where you stand and what your numbers are. Very simply this means that you need to know what you have coming in (income) and what you have going out (expenses). The best way to calculate this is to learn how to create a budget – step one in personal finance 101!

Principles of Budgeting – How to Create a Budget

Make this a simple process. Take all of your monthly expenses and subtract it from your net income. If you’re spending more money than you have coming in, then you need to do some trouble shooting (a financial audit) and figure out how to reduce your expenses as well as cut back on your spending. On the other hand if your net income is greater than your monthly expenses, then take that positive cash flow or surplus to start paying down your debts. It’s as simple as that. Don’t make this process more complicated than what it needs to be.

Budgeting Software versus Manually Creating a Budget

I will admit that I am old fashion in many aspects and this applies to budgeting. I just basically do it the old fashion way and use a pen and paper to create my monthly budget. But times have changed and so has technology. You need to take advantage of the technology that is out there and use “budgeting software” to keep track of your finances. As I was doing my research on this topic, there was one piece of software that stood out head and shoulders above the rest, and that software is “Mint”. You can find the budgeting software at: https://www.mint.com/

Mint Budgeting Software

What I like about Mint is that it does all the work of organizing and categorizing your spending for you. You will see where every dime goes and will help you make money decisions you feel good about.

Mint allows you to do three simple things: See where your money goes, make budgets to stay on track, and set financial goals for the future. Their tools help you understand how you spend so you can reach your financial goals, whatever they may be. And of course you can download the Mint app on your smartphone.

And oh, by the way, did I tell you that Mint is 100% FREE!

So once again, here is the website: https://www.mint.com/

Note: While Mint is a terrific budgeting software, there are alternatives.

Personal Capital Financial Software

What really impresses me about this software is that it is an all-in-one personal finance tool. Here is a quote from their web page:

“Our free financial software allows you to easily manage your entire financial life in one secure place – so you can reach your goals faster. Use Personal Capital’s software to develop your long-term financial strategy – calculate your net worth, set a budget, manage investment accounts, and plan for retirement.”

The all-in-one personal finance tool will:

  1. Calculate your net worth (cash flow analysis)
  2. Set a budget (keep you’re spending under control)
  3. Manage investment accounts (wealth management)
  4. Retirement Planning

Other highlights and features of this innovative financial technology company includes:

* Estate Planning

* Tax Management

* College Savings

* Act as a fiduciary on your behalf

* Forbes “FINTECH 50 2016”

* Macworld “THE BEST”

* Kiplinger “PERSONAL BEST LIST”

And lastly, Personal Capital combines innovative technology with the human touch to provide you the “ultimate service”.

However, giving a description here does no justice. Go to their website for a full overview of their services: Personal Capital

And lastly, here’s another great idea when learning how to manage your finances.

Envelope System

One very popular way to control your spending and manage your money is to use the envelope system. The envelope system basically works like this:

Calculate all of your fixed expenses and fixed debt obligations at the beginning of the month and pay them. After you pay your fixed monthly expenses, take the cash that is left over and divide it into as many categories as you need. Then for each category create an envelope and put cash in that envelope for that category that you need for that month. For example, you have a category for restaurants. You would then put $50 in the envelope that was set aside for restaurants. Once you spend the $50 for dining out for that month, then it is gone. That is the allowance for the month. And remember, once it’s gone, then it’s gone. Once you spend the $50 for dining out for that month, you cannot spend any more money for dining out for the month.

What I like about the envelope system is that it teaches you some self-discipline. It teaches you to discipline yourself to only spend a fixed amount of money on something, in this case dining out, and then after you spend it, you cannot spend anymore after that. It disciplines you to restrict the amount of money you can spend each month. This system also helps you to budget by limiting the amount of money you can spend in each category you create.

Envelope System App

Thanks to modern technology, they now have an envelope system app available at your fingertips. No more carrying paper envelopes with this virtual budget program. You can utilize this envelope system app anywhere, and anytime. This means you can now access your budget online, on any mobile device, or on your tablet. From the amount of research I have done “GOODBUDGET” offers the best envelope budgeting software on the market. You can get started and sign up for free. Go to GOODBUDGET

So this now concludes today’s lesson on how to manage your finances. What you learned in today’s lesson is how to create a budget – step one in personal finance 101!

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