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What is a budget?
A budget is a written record of the money that flows in and out of your household every month, over a period of time. A budget gives a clear snapshot of your household income, and it also shows what your saving and spending habits are. The best thing about a budget is that you can use it to troubleshoot bad habits (like unnecessary overspending).
What is net household income?
It is a measure of all the money you bring home during a month, including salary, investment earnings, child support, and alimony payments. From the total sum of all your income, you subtract all deductions (such as state and federal taxes and health insurance premiums). The result will be your net household income. This is your base amount in which you have to manage a budget.
What is cash flow?
Cash flow is net household income minus all your bills and expenses. A budget can help you predict and monitor your household's cash flow.
What is disposable income?
This is the amount your household has left over after essentials (such as groceries) are bought and bills like rent or mortgage are paid.
How do I keep track of my spending?
The best way to see what you spend is to write down the bills and expenses you expect to pay per month, and compare them to what you actually spend in the course of each month. Then you can subtract your actual expenses from your net household income to see what disposable income you will have after your bills are paid.
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Can budgeting really help me reach my financial goals?
Any financial goal is within reach if you are willing to dedicate regular savings to it, and if you shop around for a savings or investment plan that pays you a decent interest rate. You should get in the habit of putting a little aside so you can reach a goal. The trick is not to dream of unrealistic goals. Keep things simple, so you won't be disappointed. Perhaps, you've always wanted a special vacation, or a second car. Once you achieve small goals, you will build confidence in yourself to go after larger ones.
What is net worth?
Basically, your net worth is what you own minus what you owe. In order to find out your net worth, on a sheet of paper write down all that you own, along with the dollar value (include the cash you have in your bank accounts). Then add all the dollar values up. This will give you your total Assets. Now make a list of all that you owe (such as credit cards, mortgage, loans, unpaid income taxes, unpaid medical and dental bills), and add up all the dollar amounts. This will give you your total Liabilities. Now subtract your total Assets from your total Liabilities. The result will give you your net worth in dollars.
What are assets and liabilities?
Assets are the dollar values of what you own, including bank accounts, investments, cars, other vehicles, jewelry, collections, and real estate. Liabilities are what you owe, including rent or mortgage, credit card balances, taxes, and tuition.
I keep all my money in my checking account. Is that a good idea?
Don't leave any extra money that you have sitting around in your checking account, where it's earning nothing, plus you're paying a service charge. Not to mention the fact that it's tempting to spend as well in a checking account. Open a savings account, where your money will at least earn something. If you have a good amount of cash, put it into an investment plan. Ask your bank for help in investing.
How much should I save every month?
You should get into the habit of saving at least 15% of your net monthly income. Of course, if you can save more, by all means do it.
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