You’ve decided to create your first budget. We salute you. Having and sticking to a budget is the only real way to manage your finances. Otherwise, it’s kind of like driving at night with your lights off. You may end up at your destination –if you’re really lucky. Operating without a household budget is also a kind of crap shoot. You might end up at the end of the month with money left over to stick into your retirement savings account or you might not.
Creating a household budget isn’t really that tough. There are numerous apps available that make it simple. Three of the most popular of these are You Need A Budget, mVelopes and Mint, which will even send you an alert if you overspend in any of your categories.
The hard part of creating a budget is that you will first need to track your spending for at least 30 days and, if possible, for even longer. This means writing down everything you spend money on right down to that $1 package of M&Ms you got out of your company’s vending machine. It’s possible to do this on your cell phone with apps such as Cashbook Expense Tracker, Expenditure and Expense Manager. But most people find the simplest answer is to just carry around a small notebook and a pencil to record their spending.
Once you’ve done the tough part of tracking your spending – you will need to organize it into categories. There is no single way to categorize spending but many people organize it into the major categories of shelter (rent or mortgage payment), savings, food, services (utilities, cell phone, etc.), transportation, clothing, entertainment, health (insurance, prescriptions, glasses, etc.) and debt repayment. Of course, you may organize your spending into entirely different categories depending on where you live and your standard of living.
You will need self-discipline
While tracking your spending can be tough you may find it even tougher to stick to your budget. This is definitely an area where you’ll need to exercise self-discipline. You’ll need to learn to live within your categories and to avoid impulse purchases at all costs. Or, if you’re not careful, you might make one of these big budgeting blunders.
Being too rigid
One of the biggest budgeting blunders is being too rigid. Your circumstances will change from month to month and you need to be flexible enough to accommodate them. This means giving your budget room for expenses that fluctuate by season from a summer getaway to Christmas shopping. If you make a budget that’s too rigid you may find you have trouble sticking to it, which would derail all of your good planning.
You need a system to continue tracking your spending so you’ll know whether or not you’re on budget. Not getting one would be a big budgeting blunder. Fortunately, it’s easy to track your spending with an app like Mint. Or if you need more in the way of tough love you could choose mVelopes which is an electronic version of the old way to budget using envelopes. But the important thing is to choose a system, make sure it works for you and then stick with it.
Failing to stop making impulse purchases
We’ve already mentioned this but it’s important to reinforce the fact that making impulse purchases is probably the most serious of the budgeting blunders. In fact, if you can’t stop making impulse purchases, your budget will become worthless. There are some tried-and-true ways to avoid impulse spending and the best one is to just stay away from places where you would be tempted. This means that if you’re a woman you need to stay away from fashion malls and boutique clothing stores. Man will definitely need to stay away from electronics and hardware stores. And if you have a hobby you just love you will need to stay away from places where you could be tempted to buy supplies.
Forgetting those quarterly and annual bills
If you’re typical you have some bills you get quarterly or even annually like insurance premiums, tax bills, your annual medical checkup and so forth. If you fail to factor these irregular bills into your budgeting they can hit you unexpectedly and take a big chunk out of your budget. Probably the simplest way to do this is with a paper calendar where you would write down when these bills are due. Or you could use an app like Apple’s Reminders.
Failing to budge on fixed expenses
Failing to modify your fixed expenses would be a big budgeting blunder. Whether it’s your mortgage, automobile payment, your cell phone or cable bill or even insurance premiums they can all be reduced. If you’re finances are really tight you could trade in your car for an older model or move to a smaller apartment. You could probably negotiate with your cable company to get your bill reduced or, failing that, cut the cord and get your entertainment from sources such as Netflix and Hulu. You could even get your mortgage modified with a program such as the HARP plan. If you would be eligible for this program you could refinance at a much lower interest rate. And if you’re stuck with high payments on your student loan debts you could get them lowered through one of the income-based repayment programs such as REPAYE (Revised Pay As You Earn).
Getting into debt
Going into debt to buy something is just one of the worst things you can do. Debt is kind of like rust in that if it’s not dealt with it will just get worse. And one of the biggest budgeting blunders is to charge stuff on a credit card and then make just the minimum payments. Those minimum payments can look very appealing but they are a sure road to financial problems. The simplest way to avoid debt is to follow the rule that if you don’t have the money in your checking account to pay for the item, just don’t buy it.
Finally, here are some useful tips for staying out of debt and saving literally thousands of dollars a year.
Frequently asked questions about budgeting
Q. What is the definition of budgeting
Q. According to the online encyclopedia Wikipedia, a personal budget is defined as, “a finance plan that allocates future personal income towards expenses, savings and debt repayment. Past spending and personal debt are considered when creating a personal budget”.
Q. How to do budgeting when in debt?
A. Budgeting when in debt is not much different than budgeting in general. The principle difference is that the budgeting must put a high priority on debt repayment – even ahead of savings. The reason for this is that debt has a higher interest cost than the interest you would earn by saving the same amount of money.
Q. Why budgeting is hard?
A. Budgeting is hard because it requires a fair amount of self-discipline. The whole purpose of budgeting for most people is to cut their spending so they’re living below their means. This generally means making sacrifices in things like buying clothes or entertainment. It can be tough to keep making those sacrifices for four or six months when budgeting becomes second nature.
Q. Why is budgeting useful?
A. Budgeting is useful because it enables you to create a plan for your spending and ensures you’ll always have enough money for the things you need (think food, shelter, etc.) and the things that are important to you. Budgeting will also help keep you out of debt.
Q. Why does budgeting fail?
A. Budgeting fails for one or more of the budgeting blunders cited above. However, the biggest reason why budgeting fails for most people is a lack of self-discipline. The second biggest reason is usually impulse purchases.
Q. Where to start with budgeting?
A. Tracking your spending for at least 30 days is where you start with budgeting. This means accounting for every penny you spend. There are apps available that will help you with this so it doesn’t have to be as difficult as you might think.