Budgeting - 101

To live within your means it is important that you create a realistic budget. A serious look at what your earnings are, as well as a review of your expenses.  You will need to initially categorize expenses into groups.

The expense group can be broken down into:

i) essentials (mortgage/rent, utilities, food, transportation/car note)

ii) non-essentials (entertainment)

Once you have done this it will be easier to see how flexible you can be.  It will allow  you to view more clearly which items you have the flexibility reduce.  The benefits of this reduction you can then use fund an emergency fund; increase your savings or make plans for a new financial goal.  

Sometimes it is not possible to cut expenses and in such cases a look at increase the income might be necessary.  Make sure you do not put yourself in a situation where your life becomes miserable.

It is always beneficial to have an idea of what your debt-to-income ratio is as it affects your credit score.

A debt ration of 36% of your monthly income is ideal.  You should consider a debt-to-income ration of 40% as being too high.

It is of utmost importance that you commit to debit repayments that you can comfortably pay without stressing you out.  Only count income that you are actually receiving on a regular basis - if you are still interviewing for a job that income should not be included.

Below is a link to a calculator found on Bankrate.com

http://www.bankrate.com/calculators/mortgages/ratio-debt-calculator.aspx

Edited 10/13/2013

How do you view your retirement assets and rainy day fund?

Many of us live for the moment - putting nothing away for retirement and worse still not having an emergency fund to help you weather the storm during those not so good days of the cycle of life.  

As a result of the "Great Recession" instead of adjusting one's standard of living to meet current level of income many of the "underemployed" and "unemployed" have been draining their 401(k) s and IRAs - all in an effort to maintain lifestyles at levels that are not sustainable.  Generally people find it difficult to face their predicament but denial is not a workable alternative either. 

For the "underemployed" it is understandable to either reduce the amount being deferred (put away) for retirement or alternatively you can freeze the contributions for a short while. The best way to avoid dipping into your retirement assets is to ensure you have an emergency fund to cover your expenses while you are not gainfully employed.

Ideally one needs between three and six months of living expenses set aside to fully fund your “emergency fund”.  That is not to say once you reach three or six months you stop - no it would be more conservative in today's world to work around six to nine months. Many have experienced longer and longer gaps between jobs and sometimes you might realize that you need to re-invent yourself to meet the requirements of the current job market.

Edited 10/11/2013