When you hear that word budget, do you break out in a cold sweat? Do your palms get clammy? Do you want to run away and hide?
These are all common reactions to the word budget. However, they shouldn’t be. A budget can actually be your BFF.
Why budget?
The best way to determine whether or not you need a budget is to ask yourself questions such as, “are my finances out of control,” “do I always run out of money before I run out of month,” “do I know where my money’s going,” and “am I saving money or just running up debt?”
If you answered “yes” to any of these questions
If you answered “yes” to one or more of these questions, then you do need a budget. But don’t be terrified. Budgeting is not really that awful. It does take some time and self-discipline but once you have a budget in place, your life will be so much simpler you’ll wonder why you didn’t do this months or even years ago.
This article teaches the basics of budgeting and contains information on:
• Getting started
• The importance of goal setting
• Why it’s vital to track your spending
• Why use a spreadsheet program to create your budget
• Finding categories to make cuts
• How making sacrifices can feel good
• Why your budget should be a blueprint and not a straitjacket
Getting started
The first thing you need to do before creating a budget is determine where your money’s going. You do this by tracking your spending for about a month. You can do this the old-school way with a pencil and a notepad or if you have a smart phone, there is a wealth of apps available to help you do this. The nice thing about smart phone apps is that several of them will automatically categorize your spending for you. If not, you will have to go through and assign each of your expenditures to a specific category such as food, shelter, transportation, clothing, entertainment, insurance, and so forth.
Step two
Even after you’ve tracked your spending and divided everything into categories, you’re not ready to create a budget. The reason for this is that budgeting starts with goals. You need to sit down and have a long talk with yourself regarding your short- and long-term goals. You should even spreadsheet them so you can track your progress. For example, if one of your short-term goals is a weeklong vacation in Fiji, you should put that in your far left column, followed by the amount of money you will need to achieve it. Each month as you save money towards that goal you reduce the amount of money in the second column until it reaches zero. In the meantime, you will be able to see the progress you make each month towards achieving your goals, which can be a powerful motivator to stay on the budget you’re about to create.
Get a spreadsheet program
If you don’t already have a spreadsheet program, you need to get one. If you have Microsoft Office, you should have Excel as part of the package. If not, you can get free spreadsheets from OpenOffice.org or from Google documents. Once you get a spreadsheet program, you will use it to create your budget. You should have your spending categories in the far left column, followed by the amount of money you’ve budgeted for each and then 12 columns to the right – one for each month of the year.
For more information on doing a budget with a spreadsheet, check out this video. Note: This lesson is based on Excel but the information should work with any spreadsheet program.
Get out the scalpel
How do you determine how much money to budget for each category? You’ll need to review how much you’ve been spending by category and decide where you can make cuts. If you learned that you’ve been spending more than you earn, your first step should be to cut your total spending to less than your total earnings. Once you’ve done that, you need to then get to work finding areas where you can save money to start working on your goals.
The fruit that hangs low
If you’re a typical consumer, the places where you should find it easiest to make cuts – or the low hanging fruit – will be groceries, entertainment, eating out, vacations, utilities and, unfortunately, those nice, little extras such as a health club membership, tanning salons, cable TV and magazine subscriptions.
Yes, you will need to make sacrifices
As you may have guessed by now, you will need to make sacrifices in order to cut your spending. The good news is that you will be able to see how those sacrifices are worthwhile as you move closer and closer to achieving your life goals. In other words, giving up a health club membership or eating out just twice a month instead of five times a month won’t seem like so much of a sacrifice if you can see that you’re growing closer each month to that dream vacation.
Think of it as a battle plan and not as a straitjacket
A good way to think of your budget is as a battle plan. As with a battle plan, you can make changes as you learn more about your spending and your priorities. Don’t beat yourself up if you find that you cannot successfully stay completely within your budget in each and every category. Look for areas where you’re spending more than you had budgeted and areas where you are spending less. You can then adjust your categories accordingly. For example, if you find that you simply can’t cut your grocery bill by as much as you budgeted, you might find you’re spending less on transportation than you thought. You could reduce it and then increase your grocery budget accordingly.
