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Setting Up a Budget and Sticking to It

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Learn how to crunch the numbers and hold yourself accountable

According to a 2011 survey conducted by job listing site, 42 percent of workers surveyed live paycheck to paycheck, with no savings to lean on in between paydays. Instead, they spend every cent from their paychecks week after week - never getting ahead or creating an emergency slush fund that can help pull them through an unexpected medical event, job loss or car breakdown.

The only real way to break the paycheck-to-paycheck cycle is to design a budget that ensures that your expenses never outweigh your income. This allows you to put more in savings and create an emergency savings fund. Budgets don't change your bills or expenses, however. Instead, looking at your overall income on paper and comparing it to your expenses allows you to choose which expenses to keep, which to reduce and which to get rid of altogether. Here's how to create your budget:

  1. Write down your total monthly income from all sources.
  2. Look at your bank and credit card statements for the past six months, break the expenditures down into categories and write down the average amount that you spend on everything - from electricity to groceries, dining out to clothes, magazines to cable.
  3. Choose those expense categories that are necessary and fixed - such as rent, debt repayments and insurance premiums - and record your six-month average on a list of expenses.
  4. Next, choose the expense categories that are necessary but adjustable - utility bills and grocery expenses - and add those to the list.
  5. Compare your income to your expenses from numbers 3 and 4. If your income is significantly higher than your expenses at this point, then you can choose some of your discretionary expense categories - i.e., clothes, books and dining out - and record their six-month average numbers on your expense list.
  6. The amount of money that you should be saving each month really depends on your long- and short-term savings goals. Whatever they are, your expenses should be small enough that you can afford to save your goal amount and accelerate some of your debt repayment. In order to do this, you must adjust your flexible expenses - both necessary and discretionary - until they allow for that savings.

A budget can be effective only if you actually let it do its job. Creating a budget and then completely ignoring it won't accomplish anything. One way to ensure that you stick to your budget is to institute a rewards system. Set milestones for savings and give yourself a small reward when you reach them. Another way to help increase your odds of success is to hold yourself accountable for every financial decision you make. Instead of feeling powerless in the face of temptation to go off budget, remind yourself that you can say no and that if you choose not to, you are permitting yourself to fail.

Financial success isn't just a numbers game: More than money or knowledge, it requires discipline. The discipline to sit down and create a budget is an important step, but the discipline to actually follow through is vital to create the life you want to live.

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