Introduction

Budget. There it's out in the open - probably one of the most disliked words next to dentist or taxes. Don?t panic! It doesn?t have to be that way. Instead of thinking of the budgeting process as a financial straitjacket that sucks all the fun out of your life, think of it as a plan that allows you to get the things you want and need without destroying your financial future. It?s simply a guideline to make you aware of where you?re spending your money and helps you redirect it toward those things that are most important to you.

Without some kind of plan you?re destined to live from paycheck to paycheck. You end up working your entire life to pay off accumulated expenses. A budget or plan, or whatever you choose to call it, takes the power away from your creditors and puts it in your hands where it belongs. It allows you to obtain an overall view of your financial situation, level out expenses, and plan for future costs, like buying a home.

How To Set Priorities and Goals

Budgeting is all about planning. It lets you look at your entire financial situation to determine where you are now and where you want to be in the future. Before you start it's important to establish priorities by separating wants from needs.

• Clarify what you need to live day to day such as rent, food, car payments, utilities, insurance, etc. These are priorities.
• Establish goals you want to attain such as saving for the down payment on a home or a nice vacation. These are wants.
• If your cash is gone before you get to your wants, you'll need to create ways to trim your expenses so you can begin to save.

When setting goals beyond what you want in the next few months, it's important to ask yourself what's most important and what you want to accomplish. Also determine what you are not willing to do without. Allow your ambitions to create your money picture, not the other way around.

It helps to divide your goals into short-term, mid-term, and long-term categories. Examples could be:

• Short term goals such as buying a new couch or taking a weekend trip.
• Mid-term goals might include saving for a down payment on a car or new home.
• Long-term goals include saving for retirement.

Keep in mind that most goals, especially mid and long-term, will be reached through savings and investments. So when you outline your objectives be aware of any upcoming expenses, and plan your spending and savings accordingly.

And remember -- you'll need to review your goals and priorities from time to time. If you're like most people, you'll experience changes in your life - some small like changing schools, and some big like getting married. As your situation changes, your goals and priorities might be impacted. So, every once in a while, it's a good idea to see if the goals you set still make sense. Also, looking over your goals let's you see if you're where you want to be, or if you want to continue with certain plans.

Developing a Budget

Now that you've thought about your immediate needs as well as your goals, it's time to start setting up your budget.

• Collect information on past spending- Two good resources for tracking expenses are your check book register and credit card statement. For a complete picture, also save all receipts for two or three months when you pay cash.
  
• Categories - Once you know how much money you spend and where it goes, you are ready to group your expenses into categories. Use our Budgeting Work Sheet to decide what categories apply to you.
  
• Income -Determine what you can realistically expect to earn on a monthly basis. If your income varies from month to month, as a sales person's might, look over last year's income and figure out a monthly average. Try to be conservative when projecting, and be careful about including overtime, bonuses, and commissions that may not happen.
  
• Project your expenses - Using our Budgeting Work Sheet determine how much money should go into each category to meet expenses. For those expenditures that only occur once or twice a year, like auto insurance, figure out how much money you need to hold back each month so you'll have enough when those bills show up. Don't forget to anticipate future expenses such as auto repairs.
  
• Balance your budget - If you think you have a pretty good idea of what's going out and what's coming in, now comes the moment of truth. Use our Current Spending Work Sheet to find out whether you make more than you spend or spend more than you make. If your income is greater than your expenses, fantastic! Now is the time to set up a regular savings plan. If your expenses are greater, don't panic, your situation can be improved by adjusting some spending habits.
  
• Fine tuning- One of the biggest benefits of the budget process is finding out where you're spending your money. It also identifies events and activities that are spending triggers that cause you to squander money. Realize that your newly created budget will have to be adjusted - maybe spending a little less here and there--for the first few months until you get things where you want them. Even then, you'll want to review your budget periodically to make necessary adjustments.

Manage Your Debt So It Doesn't Manage You

Carrying too much debt can cost you more than just the interest you pay -- peace of mind and lifestyle flexibility can also become casualties. How you handle this debt has a very important impact on your credit report and your ability to borrow money in the future. If you find yourself with more debt than you can easily manage, 1st Source Bank wants to help you get your finances back in your control.

• Stop buying on credit- If you owe a lot of money to credit card companies, put your cards away, or cancel them if you can't resist temptation. Try to pay for all purchases with cash or a check until you've eliminated your credit card balances.
• Prioritize your payments- Look at all your creditors and determine which balances should be paid off first, then concentrate on them as much as possible-but not to the exclusion of other creditors. The first debts you want to pay off are those that carry the highest interest rates, typically credit cards.
• Debt consolidation loan- If you owe money to several different creditors, you may want to consider consolidating your debts. This can involve an installment loan, a second mortgage or home equity loan which is used to pay off all debts. You then have one payment that might have tax benefits that aren't available with other types of credit. If you choose the option of a second mortgage or home equity loan be aware that your home is being used as security, and if you can't make your payments, you run the risk of losing your home.
• Communicate with your creditors- Don't be afraid to contact your creditors if you think you're going to have problems making your payments. Many times they will be willing to work with you to lower your payments to a more manageable level. If you aren't able to stick to a repayment plan you've worked out with a creditor, you may want to contact a credit counseling service.
• Tighten your belt- Search for ways to fine tune your budget and cut back. Look at what you really need and what you really don't. Here are some easy ways to make your money go further: use coupons, buy generic products, go to matinee movies, and dine at home vs in restaurants. Also, review your long distance charges and auto insurance. Can you get a better price with other companies? And, are you really watching those premium movie channels you pay for every month? Individually most savings seem small, but together they add up.

Organizing Files and Important Documents

Organizing your files is similar to setting up a budget. It requires a bit of work at the beginning but pays big benefits later on. Keeping complete records helps you provide proof of your income and expenses if the need arises (this documentation will be needed when purchasing a home), and makes tax time a whole lot easier. Good record keeping helps save time and gives you peace of mind knowing the information is at your fingertips.

Here is a list of documents you should keep:

• Pay stubs
• Credit card statements
• Bank statements
• Canceled checks or images of canceled checks
• Investment statements and other investment material
• Dividend statements
• Federal and state income tax returns
• Insurance company statement of benefits
• Insurance policies
• Monthly loan statements
• Auto and medical insurance statements
• Retirement plan documents (401K, pension plans)
• Any other documents regarding income or significant purchases

Store irreplaceable documents in a safety deposit box or a fireproof safe in your home.

Helpful Forms

To help you create your budget and organize your finances, 1st Source Bank has provided some easy to use forms for your convenience. All you need to do is click on the links below to access these forms. You'll need the Adobe Acrobat Reader to utilize these documents. Refer to them periodically to update pertinent information and store them in a secure place.

• Current Spending Analysis
• Budgeting Worksheet
• Financial Inventory
• Net Worth Worksheet
• Personal Inventory