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“What’s The Best Way To Set Up A Budget”

Where it starts

The way that setting up a budget starts isn’t with setting up a budget. It begins with tracking your expenses for three to four weeks so you can see where your money has been going and why it’s all gone by the time you get paid again. You can do this the old school way with a pen and notepad or with your smartphone and an expense tracking app. If you have an iPhone, there’s a fast and beautiful expense tracker called Next. Android phone users could choose Cashbook Expense Tracker or a similar app.smiling woman managing finances

Do a mash up

Step two in setting up a budget is to mash up your expenses into logical categories. This could be food, entertainment, medical costs, insurance, mortgage or rent, transportation and so forth. (Click here for a comprehensive list of budget categories and recommended percentages.)

Where, oh where to make cuts

Now that you know where your money is going you need to figure out where you could reduce your spending. Most people find that the easiest categories are food, clothing and entertainment. But you need to review all your categories, asking yourself the question how can I spend less. For example, if you use the list of budget categories I mentioned in the previous paragraph, you would find that you should probably be spending somewhere between 10% and 13% on food. If you find you’ve been spending 20%, this is a place where you might be able to make a cut. How about clothing? The recommended percentage for this category is 5%. Have you been spending more? Then this is an area where you might be able to save some money.

Don’t forget savings

Make sure your budget includes the category “Savings.” Your goal should be to save 10% of your take-home pay each pay period. You should put the money into a savings account and then maybe move it into a CD every quarter. That makes the money a bit more difficult to access, which reduces the temptation to dip into it.

Make goals

If you don’t create goals you may find it very difficult to stay on a budget. You should write down both short- and long-term goals. A good short-term goal might be to save money for a vacation. Long-term goals could be to get out of debt or buy a house. The point is to have attainable goals so that you can see you’re making progress. When you can see you’re moving towards realizing a goal, you should find it easier to stay on track.

Your budget shouldn’t be a straitjacket

Your budget shouldn’t be a straitjacket. It should be more like a blueprint. As you become more and more experienced with budgeting, you should be prepared to make adjustments. You might find that allocating 12% of your budget for food isn’t enough while 13% for transportation is too much. In this case, you could cut the 13% for transportation down a bit and use the money to increase your food budget.

Help me make a budget

Woman with pen and pencil making budgetThe foundation of good money management is budgeting. And the foundation of budgeting is good bookkeeping, which begins with tracking your expenses so that you’ll know where your money is going. You will need to track every expense for at least a month. You could do this the old-fashioned way with a pencil and a notepad or if you have a smart phone with one of apps now available such as Cash back Expense Tracker or Expensify for Android phones or Expense Tracker Pro for iPhones.

Use a spreadsheet

Your next step should be to set up a budget on a spreadsheet. The top row should be months and each leftmost row expense categories. You should divide your expenses into fixed and variable. Your fixed expenses would typically be your rent or mortgage payment, your auto loan, insurance and property taxes (if applicable). Your first “month” needs to be the expenses you’ve just tracked – as a starting point. Your next month would then be the current month. Don’t forget to have at “Totals” row at the bottom of each column.

What are variable expenses

In comparison, variable expenses are those where you could make cuts. Examples of these include food, entertainment, hobbies, dining out, subscription and dues, household expenses, and don’t forget savings.

Where you could make cuts

Now that you’re organized and can see where your money has been going by category, your goal should be to determine where you could make cuts to free up the maximum amount of money for savings, to pay off debt, to take that dream vacation or some combination thereof. The areas where most people find it easiest to make cuts are in food, entertainment, fitness, eating out, subscription and dues. Unfortunately, these are the sort of “fun” categories, which means if you really want to reduce your spending you will be making some sacrifices.

Some specific examples

For example in the category of entertainment, do you have cable or satellite TV? Is it a standard or premium package? If it’s a high-end package, you should be able to scale that down to a more basic one. When it comes to dining out, you don’t have to give it up entirely. Instead, simply choose to eat at less expensive restaurants. What about your cell phone? Do you have one of those all-inclusive packages that let you talk, text and browse the Internet? If so, you might be able to scale back to one that just lets you make and take calls. If you’re worried about your fitness, you wouldn’t necessarily have to give up that health club membership. You might be able to find a cheaper club or use a community rec center for your exercise. We have two great ones near us and they cost just $1 a visit.

The lowest hanging fruit

If you’re typical, food is the category where you should be able to make the biggest and easiest cuts. In fact, you could probably cut your food costs by at least 25% just by using coupons and taking advantage of store specials. Our supermarket recently sent us a “personalized” coupon that saves us money on 10 of the items we buy most regularly. Maybe your store does the same. If not, look for specials in your local newspaper, especially what are called BOGOs or buy one, get one. When you find a sale on common, everyday items such as paper towels, toilet paper, detergent and the like, be sure to stock up for at least a month.

Keep tracking those expenses

You will need to keep tracking your expenses and then entering them into your spreadsheet so you can see how you are doing versus each of your budget categories. You may have to make some revisions after the first few months but that’s acceptable so long as you don’t exceed that budgeted “Total” at the bottom of each month.

Budgeting – The 7th Way To Get Out Of Debt

budgeting money to conquer debtDid you know some experts say there is good debt and bad debt? Good debt is debt used to buy something like a house that will appreciate in value or an automobile that can be used in your job. On the other hand, bad debt is debt that was used to buy an item that will depreciate in value or that has inherent value – like a flat screen TV.

If you have debt that’s spun out of control, there are basically seven ways to deal with it. They are:

• Cut deals with your creditors
• Borrow money to pay off high interest debts
• Consumer credit counseling
• Bankruptcy
• Debt Consolidation
• Balance transfer
• Budgeting

The only “instant” solution

The only way you can get rid of unsecured debts such as credit card debt quickly is by filing for a chapter 7 bankruptcy. You can find lawyers who will handle a bankruptcy for $500 or less and, in most cases, it will get you free from most of your debts in six months or less. Five of the other options won’t eliminate your debts. They’re just ways to move your debts from one set of creditors to another.

Budgeting

The seventh way to manage debt is budgeting. It will take time and some self-discipline but it’s the only way to totally eliminate debt without having to borrow more money and without ruining your credit for 10 years as would happen if your filed for bankruptcy. If you have the right attitude, budgeting can actually feel good as you see yourself getting closer and closer to your goal of becoming debt free.

Getting started

The first step in creating a budget is to determine your current monthly spending and then compare it to your income. You will probably have to track your expenses for a month to learn how much you’re spending in such categories as food, transportation, housing, clothing, utilities, insurance, leisure and entertainment, education and so forth.

Compare this with your monthly income

Step two is to subtract your monthly income from your total spending. This will tell you how much you need to reduce your spending to stop piling up debts and start paying them down. Suppose for example that your monthly income (after withholding) is $2000 but you’ve discovered you’re spending $2,500 a month. In this case you would need to trim your spending to around $1,800 to cover your monthly expenses and have $200 left over to pay down your existing debts.

Where to cut?

Now, go back to your list of monthly spending categories and review each one to see where you might make cuts. There are no hard and fast answers to this but there are “soft” categories where you should be able to reduce your spending. These usually are ones like entertainment, clothing and food. I call them soft because it’s often possible to make cuts in them vs. “hard” categories such as housing, insurance, utilities and etc., which are pretty fixed.

Don’t make yourself crazy

One mistake some people make in creating a budget it so make one so restrictive they go crazy trying to stick with it. You should leave some room for entertainment or for the occasional impulse purchase. If you don’t you could find you’re constantly failing to stay within your budgeted categories and end up just jettisoning the whole thing.

Stick to that budget

Of course, the hard part is sticking to that budget. One good tool that can help is to put everything on a spreadsheet so you can see that you’re staying within your budgeted categories and that, most important, that you’re making good progress on your goal of becoming debt free.

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