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For some people words like [Link Removed] are ugly financial monsters designed to suck all the fun out of life. It's safe to say that's an over-reaction cause a budget can be really useful.  

Before going into the steps on how to work out a budget, let me first tell you how a home budget can help you or guide you to manage your finances better:

1.) Firstly a budget shows you where your hard-earned money is going.
2.) It helps you get control of your cash flow.
3.) With a budget you will be better equipped to meet goals like paying off a debt (like student loans) or making an important purchase (like getting your first home.)
4.) A budget also helps you keep useful records for tax and other purposes like applying for a home improvement loan.

How to Start

The first step in setting up a budget is to gather the financial information you need to figure spending limits and savings goals. You can do this is one of two ways:

1. Assemble all your bills for the past 12 months

a.) Add the totals and divide by 12 to figure out an average amount per item.

b.) Evaluate the items to see if anything is more seasonally expensive. For instance, does your electrical bill run higher in the summer when the need for air conditioning is greater?

If so, you will need to adjust your cash flow accordingly in whatever month the bill begins to go up. (Note that many electrical companies offer "average" plans to help you offset these fluctuations. Your monthly usage is figured into a running average and your bill total is set accordingly.)

2. Assemble three months' worth of bills and run your averages based on the totals

a.) While this methods is easier in terms of finding the information, it will not show you seasonal fluctuations. You will need to watch your incoming bills closely and adjust your budget accordingly.

Note that any budget will become more accurate over time as "real" numbers are plugged in. You will also have a better feel for how to plan for incidental expenses.


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