How To Create A Budget And Invest Extra Income

02
April

Money can be one of the most frustrating concepts to understand for newcomers to finance. A popular saying is that if you do not use money wisely, money will not use you wisely. What this means is that money is a powerful tool, and it can be used for either good or bad ends. The key to using money at all, however, is to understand it. This represents a greater task for many than climbing Mount Everest. It is tempting to take the easy road out by blaming one’s own financial troubles on forces outside one’s control. Today those forces usually take the forms of government and corporations.

Blaming others for the misfortunes and problems of one’s own life is as foolish now as it has always been. To understand how money works, you have to understand how you handle it and how you should be handling it. To do this, there is no better way than to create a budget for yourself. A budget is your estimation of how much income you will receive and how many expenses you will have for a given period, usually a month. Income is money that you receive through work, gifts, etc. Expenses are things such as food, gasoline, insurance, utilities, and clothing – any thing that costs money to procure.

Creating a budget is not hard. All it takes is some financial know-how and a little time, usually not even an hour. However, understand that the results of your budget will dictate your financial actions from now on. The laws of money are inflexible, and irresponsibility will only lead to ruin. So, to create a budget, first gather all financial statements you have. This includes bank statements, investment accounts, your most recent utility bills, grocery store receipts, etc. The idea is to come up with a total monthly average, so every bit of information you can gather is needed.

Using the gathered information, create two lists: a list of sources of income and a list of expenses. For the income list, if you are self-employed or have any outside income sources, be sure to incorporate these as well. If your main source of income is in the form of a monthly paycheck where taxes are automatically withheld, use the net amount of take home pay. Add up all the income sources for a monthly total.

The list of expenses should include every expense that you expect to incur over the course of a month: mortgage payments, car insurance payments, utility payments, grocery bills, entertainment, etc. It also includes retirement and college savings. Add this list up to a monthly total as well.

Then you need to divide the list of expenses into two categories: fixed expenses and variable expenses. How to determine fixed from variable expenses is easy: look at the expenses that stay the same from month to month, like the payments on your mortgage or your car payment. Then look at the expenses that change, like grocery bills or the amount spent on clothing per month. The next step is to take the total monthly income and total monthly expenses and compare them. If your income exceeds expenses, that is a very good thing. You can prioritize this extra income to areas of your budget like retirement savings, paying off credit card debt or investing.

Investing saved income is a great way to have your money work for you. You can invest in the stock, bond, and money and foreign exchange markets either by yourself or through a broker. Choosing a broker can be a tedious process because each one has to be evaluated thoroughly before you invest any money. Investing your extra or saved income is also a risky process because all markets are subject to upswings and downswings. Do not invest your money if you expect a huge return in a short amount of time, and never invest your money with anyone who promises that.

This post was written by

jason – who has written posts on Budget Clowns.
Father of three and married to a lovely women. Always looking for ways to save money, and invest it properly for my children's future.

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