A budget helps you focus on important financial goals. To create your own budget, add every dollar you spend for a month, and monitor what you purchase. You may be surprised how much you spend and on what things.

Total your income and subtract your expenses. Gather pay statements and other income statements, check registers, bank statements, credit card statements, or bills and receipts. Divide your annual net income by 12 to determine monthly net income.
Use the Budget Work Sheet to record the amounts you plan to spend for the month. Financial planning professionals recommend targeting at least 10 percent to 15 percent of net monthly income.
Monitor your spending. Keep written records of your purchases and payments, and record the amounts you actually spent for the month.
Review your plan. Compare what you spent to the amounts you planned to spend. How well did you do for the month? Did you have extra money (net cash flow), or did you borrow money by using a credit card? Look for areas that require special attention, and reduce or eliminate expenses as needed. Review your spending plan at least once each month.
Adjust your plan. Modify expenses to reach your financial goals.

Save, Save, Save

Saving money is like paying yourself a salary: it helps you earn financial security. To make saving a regular part of your life:

Think of saving as a bill you have to pay. It should not be optional.
Pay yourself first. Authorize your bank to automatically transfer a portion of your pay to an interest-bearing savings or money market account as soon as it is deposited. That way, you will not miss the money.
Save at least 10 percent to 15 percent of your net income. If you cannot afford this amount, you should save as much as you can. The key is to start saving now.
Build an emergency fund of 3 to 6 months of basic living expenses — enough to manage a crisis without borrowing money.
- The fund should be low-risk and liquid, which means the money is available whenever you need it.
- An interest-bearing savings or money market account may be ideal.
Increase savings contributions when you can. For example, when you receive a raise or bonus, consider adding some or all of the additional earnings to your savings.

Saving: The Longer The Better

Earning compound interest can produce a substantial return on your investment — when it has time to accumulate. Even if you save a small amount, starting early and saving regularly over time offers the best results.

Saving Over Time* (until age 70)
Age	Amount Saved Annually**	Annual Compound Rate	Amount Contributed	Amount Earned	Amount Accumulated by Age 70
20	$3,000	8%	$150,000	$1,704,015	$1,859,015
30	$3,000	8%	$120,000	$ 719,343	$ 839,343
40	$3,000	8%	$ 90,000	$ 277,038	$ 367,038

* This example is for illustrative purposes only. It does not represent the performance of a particular savings instrument. It is not adjusted for inflation.
** Lump sum contribution at the beginning of each year.

Save Early To Earn More*

Hayley and Carlos both make a lump sum contribution of $5,000 at the beginning of each year and earn 8 percent compound rate annually:

Hayley begins saving at age 25 and stops when she is 35. When she is 65, her retirement savings total is $787,171.
Carlos begins saving at age 35 and continues saving until he retires at 65. Even though he saves more money over a longer period, he accumulates 22 percent less than Hayley. When he retires at age 65, he has $611,729.

If Carlos waited until age 45 to save, he would have to save $15,927 each year until he retired at age 65 to reach Hayley's retirement savings amount of $787,171.

The best approach is to begin saving early. Contribute regularly to retirement accounts until you retire.

* This example is for illustrative purposes only. It does not represent the performance of a particular savings instrument. It is not adjusted for inflation.

Eliminate Debt

Living within your means and being debt-free are essential for financial security. If you have accumulated too much debt from credit card spending, college loans or other loans, develop a plan for paying your debt in full:

Eliminate credit card balances. Start with the card having the highest interest rate and pay as much as you can until the balance is zero. Continue until all balances are zero.
Close high-interest credit card accounts. Keep one card that has a low interest rate and use it for emergencies only.
Eliminate personal loans and financed items such as a vehicle or furniture. If your auto loan does not charge prepayment penalties, consider making extra payments until you own the vehicle.
Make extra payments to student loans as soon as consumer debt is eliminated.
Take advantage of free and low-cost credit advice from sources such as the National Foundation for Credit Counseling at www.nfcc.org.

Do not let credit card balances accumulate. If you spend $3,000 using a credit card and pay only the monthly minimum due, it will take almost 22 years to eliminate the debt and cost $4,115 in interest. The following example shows how expensive credit card debt can become when you spend more than you can repay within 30 days.

Credit Card Debt Multiplier
$3,000 Balance	Interest Rate	Time To Pay Off	Total Interest	Total Cost
Pay minimum (2.5% of Balance)	18% 11%	21 yrs. 11 mos. 14 yrs. 9 mos.	$4,115 $1,606	$7,115 $4,606
Pay $100/mo.	18% 11%	3 yrs. 5 mos. 3 yrs.	$1,015 $ 524	$4,015 $3,524

How Much Is Too Much?

Financial planning professionals recommend keeping your personal debt-to-income ratio at or below 20%, excluding mortgage or rent.

Debt-to-Income Ratio

Total monthly payments (exclude mortgage or rent)
÷
Net monthly income
=
Debt-to-income ratio

Example	If your total monthly payments (excluding mortgage or rent) equal $400 and your net monthly income is $2,000, your debt-to-income ratio equals 20%.
	$400 ÷ $2,000 = .20 or 20%

For Information

The USAA Educational Foundation publications, Get MoneyWise, Managing Credit And Debt and Making Money Work For You, offer more information.

Next: Set Goals

Updated Thursday, August 16, 2007

HELPFUL FORMS & LISTS

Budget Work Sheet