If you’re typical, your mom probably never told you much of anything about budgeting. If she didn’t say something it was probably just that you needed to have a budget. Your dad might have been a bit better but again if you’re typical, he probably didn’t sit down and discuss the facts of budgeting with you as he or your mom might have discussed the facts of life.
Do you really need a budget?
It’s true that many families do very well without a budget. These people generally fall into one of two categories. They either have so much money that they don’t need a budget or they’ve sort of learned how to budget on the fly based on their life experiences. For example, many people in their 40s and 50s instinctually know how much they can spend and save without having to sit down and formalize things.
Budgeting for the rest of us
However, most of us do need a budget. This will be especially true if you are struggling with money and debts. We’re surrounded today with messages about how if we just buy this latest electronic gadget or a new wardrobe, we will be as happy as a fiddler at a bluegrass concert. If we fall victim to these siren songs, it’s easy to wake up one day and find that our finances have become hopelessly hashed up. This is where a budget can become a white knight to the rescue.
Actually the first step in establishing a budget isn’t to create a budget. It’s to your goals – both short-term and long-term. The reason for this is because most financial experts agree that it’s practically impossible to stay on a budget unless you have goals.
When you have goals, you can see that you’re making progress towards achieving them, which can be a great motivator for staying on that budget.
Where is your money going?
The second step in making a budget is to a learn where your money’s been going. This means tracking your spending for probably a month. We know you are thinking, “oh, what a drag.” However, thanks to today’s smart phone apps, tracking your spending is about as tough as rolling down a hill. Many of these apps, such as Mint and Expensify will automatically categorize your spending for you so that you can see exactly where your money’s going.
If you would like some additional help in making your budget, this video has some good information.
Where to make cuts?
Of course, learning where your money’s going is only half the battle. The other half is going over each category with a fine tooth comb to see where you could make cuts. This is especially important if you’re struggling with debt. The reason why you’re having a problem with debt is simple. You’re spending more than you earn. So your first goal must be to reduce your spending to the point where it’s less than your income. Once you achieve this goal, the next step is to go over that budget again, find areas where you can make even more cuts so that you’re now spending a fair amount less than you earn and can put the difference into savings or into paying down your debts.
Fixed and variable
One way to attack this is to divide all your categories into two groups – fixed and variable. While we can’t tell you precisely where you could make cuts, we have found that the easiest categories to find “leakage,” or places where you could reduce your spending are variable ones such as food, entertainment, dining out and clothing. However, don’t ignore those fixed costs such as housing and transportation. If you put your mind to it, you should be able to reduce your spending in these as well. It may not be pleasant but it can be done. For example, you could reduce your housing costs by moving to a smaller house or apartment. If you own your own home, you could sell it and buy a smaller, more energy-efficient house. You might also be able to reduce your transportation costs by selling your car and buying a more efficient one, by getting into a car pool or by taking public transportation several days a week. If you’re having a problem deciding how to categorize your spending, here is a list that could help.
- Utilities, including electricity, natural gas and water
- Food – what you spend at the grocery store
- Family obligations – are you paying for child care, elder care or child support?
- Health and medical – health insrance and co-pays
- Transportation – gas, vehicle maintenance, repairs
- Debt payments – your monthly payments on credit cards, etc.
- Entertainment/Recreation – what you spend to attend movies, eat out, camp or vacation
- Pets – food and medical costs
- Clothing –
- Investments and savings if applicable)
- Miscellaneous – stuff you spend money on that doesn’t fit into any of the categories listed here.
Most people who start budgeting soon learn that they’ve made errors and maybe even big ones. As an example of this, suppose you thought you could limit your grocery spending to $400 a month and you actually spent $550. Don’t be discouraged. Learn from your mistake, make adjustments to your budget and move on. You might be able to find other categories where you could make up that $150 difference. Or you might find ways to spend less money on food. For that matter, you shouldn’t think of your budget as something carved in stone. Instead, think of it more as a game plan. No football coach would institute a game plan and then never deviate from it no matter the circumstances. He would watch the game and then make changes to fit what was happening on the field. You should view your budget the same way.
Keep on tracking
You will need to continue tracking your spending. For the first few months you should sit down at the end of every 30 days and compare your spending versus your budget and make adjustments accordingly. The really important thing isn’t how much you spent in each category but that you stay within the total amount you budgeted for the month. If you can do this, you will be able to have money to pay down your debts, to stash away in an emergency fund or to save for retirement. Plus, you will have a much happier, less stressful life