Budgeting is one of those topics that is considered to be a basic, fundamental necessity for good financial health and yet so few people actually take the time to create and follow a budget. I am going to give you some tips and tricks to help you rough out a budget and understand how to use it. You may think that I am making it seem simplistic, especially if you consider yourself a budgeting guru. It has been my experience that simple is better, especially if you want to learn the concept and principles for effective budgeting.
Why Budget?
Why should I bother with a budget? The purpose of a budget is simply so you know where your money is going. “Little leaks sink big ships” as the saying goes, but where are those stupid little leaks that are sinking your financial ship? I worked 80 hours of overtime last month and I am short on cash, where did it go? How come I keep getting raises but I can’t get ahead on my credit card debt? I just can’t seem to find the money to put in savings, what do I do? Obviously you are spending more than you are making, and a budget shows you where to make changes to get you in control of your money.
Putting money aside
Let’s discuss another big reason to have a budget. You know that you should be putting money aside for emergencies, into savings, making sure you are working towards retirement, and even putting a little away for your kids’ college. How are you supposed to find the extra money to do all those things? Mmmmm, let me think. Oh, that’s right, a budget will let you plan and and find areas where you can save money so that you can set money aside for all those areas.
Actually doing it
Ok, now for a dirty little secret. Creating a budget is actually not that hard to do (shhh, don’t tell anyone!) Grab your bills and receipts, snag your credit card statements and put it on a spreadsheet. How much did you spend on groceries? How much on gas? What is your house and/or car payment? How about your phone, cable, and electric bills? Now, make a note of how much money you make a month and compare to your bills for a month. Congratulations, you made a budget! Remember, a budget is simply a tool to help you see where your money is going. Now, if you want you can get fancy and create an elaborate budget and I would encourage you to consider it, especially if you are struggling paycheck to paycheck. However, even if you have some wiggle room with your money, you still need to actively manage where money is going because it will quickly vanish if you aren’t careful. If you don’t believe me, just think about how many people have become rich (think lottery winners) and then lost it because they didn’t bother to actively monitor their money.
A few tips that will make it easier for you to make a usable budget. When you are listing your expenses, start with the monthly repeating bills like phone, electric, rent/mortgage, etc. so you can get your layout started and get the hang of how it will look. Make categories for the different types of expense/bills, and try to separate out need vs. want expenses. This is very important for when you need to find areas to cut back in order to get your financial health under control. This is where you find the money to accelerate paying off debts like credit cards and loans, this is where you find the money to put into savings, and also where vacation money comes from. I would recommend tracking EVERY dollar, especially at first. You will be SHOCKED at how quickly the little expenses add up to big dollars.
There are many software programs that can help you manage your money and create your budget. A great program is Quicken, and they have several different levels so that you can choose the one that works for you. (Yes, you can find Quicken in my online store, in both the download form and normal disks-shipped-to-you form. If you are looking for a free option, Mint.com is a wonderful free program from Intuit, the same maker of Quicken and TurboTax. I highly recommend using a program like Quicken or Mint.com so you can pull all your accounts and bill together and track everything easy an quickly.
Spreedsheets
If you are a spreadsheet type of person, I recommend using a spreadsheet like Excel or the OpenDocuments spreadsheet because it makes it so much easier to lay it out, keep it updated, and it handles the math for you! Create categories such as gas, entertainment, groceries, eating out (you get the idea) and then enter the individual amounts in a formula in the cell in the spreadsheet. For example, for groceries it might look like =56+78+15+47+34. The program will automatically calculate it for you and show the total of 230. Obviously you may not want to list every grocery receipt every month, but you do need to get an idea of how much you are spending and periodically check to see if you are spending more or less in a category. I like to use the same method for estimating expenses, like for gas if I fill up weekly I will put in =4*50 (provided that my fill ups are about $50) so that my budget has my gas in it. The great part is that at any time you can change the numbers to reflect updated data. I personally prefer Excel for my spreadsheet (I use spreadsheets for EVERYTHING) but if you do not have access to copy of Excel, you can get Open Documents for FREE and it works pretty good.
Obviously there is more than one type of budget and one very common budget is a planning budget used for preparing for expensive upcoming events like vacations, weddings, parties, vehicles, etc. A planning budget gives you the power to adjust various expenses to stay affordable and prioritize where the money is spent. For example, let’s say you are going on a long deserved week vacation. You have a set amount you want to spend, but you also want to hit a few fun things like waterparks, a themepark, museums, etc. Where can you save money so you can have some fun? A budget will show you where you can cut back so you have money to spend elsewhere. Are you concerned about affording a wedding? A budget will make it possible by guiding you to make the right spending decisions.
Budget Templates
- Budget Calculator (courtesy of the Financial Consumer Agency of Canada)
- Personal Monthly Budget (courtesy of Microsoft Office)
- Personal Yearly Budget (courtesy of Microsoft Office)
- Wedding Budget (courtesy of Microsoft Office)
Summary – If you want to be in control of your money, you have to know where your money is going and for that you have to use a budget. A budget allows you to save money, get out of debt, and plan for future expenses.