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To keep it simple, I suggest reviewing a single month's worth of financial information. Of course, if you want even greater accuracy, you can always use a longer time period, or repeat this process for additional months. To begin, you'll need to develop an understanding of what you were working with (your income), and what you spent (your expenses). For this part, you'll need a piece of paper, something to write with, and your checkbook ledger.
From your checkbook ledger, select a month and write down how much you got paid. Note, this figure isn't what Uncle Sam say's you get, it's the combined amounts that you wrote in your checkbook ledger for that month. Assuming you get paid bi-weekly, I also suggest using a month in which you got paid only twice. The second step is to list all of that month's expenses and add them together. Now, subtract your expense total from your total income and see what you come up with.
This next part begins the process of controlling the flow of your money. Revisit your list of expenses and rearrange them by priority from the most important to the least. Items at the top of your list should include things that absolutely have to be paid, like your mortgage, electric bill, food etc. Items at the bottom would include additional expenses such as eating out, and entertainment etc. Next to each expense, write the amount that was spent on each. To makes this even simpler, you might want to lump some things into categories, such as utilities and entertainment.
We'll now use the results to project future cash flows. Are you saving as much as you would like to? Let's say that you want to save 10% of your income. To calculate this, multiply your income by .10. If you are saving more than 10%, congratulations! If you would like to save more, review your list of expenses, and make adjustments until you attain your savings target. Are there some other things that you'd like to do with your money? Add these things to your list of expenses. Now review your list of expenses and determine where you can make adjustments to fund the new items. Note, this will likely mean lowering how much you spend in other areas. It might even mean eliminating other expenditures until you are able to allocate enough money to cover the new things that you've added to your list. Now, if you don't have the money to satisfy all of your desires, don't dispair, because most of us don't. But, by following this method, you can begin allocating your money to the things that are most important to you.
By following this method, you'll begin to discover what's really important to you, and gradually develop a budget that will enable you to reach your goals. I suggest revisiting this procedure as often as necessary, and making ongoing adjustments to align the New Year's spending behavior with your ongoing goals. For more information on managing your money, please visit my website at http://www.longrunfinancial.com/.
