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When you hear the word budget does it send cold chills running up and down your spine? Would you rather eat a plate of broken glass then make and stick to a budget? Then there’s good news. You may not need a budget.
Who needs a budget?
There are all kinds of articles and websites stressing the fact that you should have a budget. However, this may not be true. There are several types of people who basically don’t need a budget. First, there are people who have so much money there is no reason for them to track their spending and make a budget. Those fortunate souls can spend their money however they wish and with no regard for the consequences. A second group of people that may not need a budget are people in their late 30s, 40s and older who have been handling their finances successfully for 20 or more years. These folks know instinctually how to manage their finances, how to save money and how to stay out of debt.
People who need to budget
If you’re in your 20s or early 30s and just starting out in the real world, you may need a budget. You may also need a budget if you’re struggling with debt – regardless of your age.
What is a budget and why it’s important
What exactly is a budget? According to the online encyclopedia Wikipedia, a budget is a finance plan that allocates future personal income towards expenses, savings and debt repayment. Why is budgeting so important? The short answer to this is that a budget is a plan for how you will spend your money and how you will achieve your goals in life. If you don’t have a plan, you’ll most likely end up struggling to get through every month without running out of money or you could end up seriously in debt. Or as the famous baseball player Yogi Berra once commented,” If you don’t know where you are going, you might wind up someplace else.”
Tracking your expenses
The first thing you don’t want to do in creating a budget is to just sit down with a piece of paper and a pencil (or a spreadsheet) and start making guesses as to how much you’re spending by category, such as groceries, entertainment, insurance, dining out, and so forth. That would be a big mistake. What you want to do is actually track your spending for at least a month. You can do this with a notebook or you could use one of the several smart phone apps now available. Three of the most popular of these are PocketMoney Lite, Xpenser and Expense Tracking. The website Mint.com also has an app that can be used on all three types of smart phones and that does much more than track your spending. In fact, it’s a kind of a Swiss Army knife of personal finances as it can be used to keep track of your checking and savings accounts, your investments and your credit cards. Once you use Mint to track your expenses, it will automatically categorize them for you and then send you an alert any time you exceed the amount you budgeted for a category.
Creating your budget
Once you have tracked your spending for 30 days, you need to divide it into categories. There is one list available that has more than 90 budget categories. But this could be serious overkill especially if you’re just beginning to budget. A better idea is to start with just major categories and then add others as you learn more about your spending habits. Here’s a “starter” list of budget categories.
• MORTGAGE OR RENT
o Homeowners/Renters Insurance (actual amount paid)
• UTILITIES
o Electricity
o Water and Sewer
o Natural Gas or Oil
o Telephone (Land Line, Cell)
• FOOD
o Groceries
o Eating Out, Lunches, Snacks
• FAMILY OBLIGATIONS
o Child Support/Alimony
o Day Care, Babysitting
• HEALTH AND MEDICAL
• TRANSPORTATION
• DEBT PAYMENTS
• ENTERTAINMENT/RECREATION
• PETS
• CLOTHING
You may want to eventually divide some of these general categories into more specific ones. For example, you might want to divide transportation into gas, repairs and auto insurance. But for most people, these categories would be a good place to start.
Where to make cuts
Of course, the purpose of budgeting is not just to see where your money is going but where you can make cuts – to save money or to just get your spending under control. To do this you will need to carefully review all your categories to see where you can reduce your spending. If you find that you’re spending more than you earn, your first goal should be to reduce your spending to the point where your expenses are less than your earnings. To do this you will need to carefully review each category looking for linkages – places where you can make cuts. Most people find that the easiest categories to reduce spending are food, entertainment, clothing and eating out.
Sticking to that budget
Once you have created a budget, you’re halfway home. But now comes the part that might be even more difficult, which is sticking to it. You will need to continue tracking your spending to make sure you’re not exceeding any of your budget categories. Some people can do this by putting all of their spending on credit cards. However, this does require a fair amount of self-discipline. One alternative to this is to use what’s called the envelope system of budgeting. Here’s a short video that teaches the system.
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The joy of budgeting
As you can see, budgeting takes time, effort and some amount of self-discipline. But don’t think of budgeting just as a straitjacket or a nasty task that you must perform over and over. Instead, keep focused on the benefits of budgeting. For example, if you’re struggling with debt budgeting can help you get it under control and ultimately paid off. You can also use budgeting to build up an emergency fund equivalent to six months’ earnings so that you’ll have enough money to weather just about any financial emergency without having to create debt. Plus, budgeting can help you fund your retirement. It’s become increasingly clear over the past few years that counting on Social Security to fund your golden years could be a big mistake. You need to be saving money for your retirement, which is almost impossible to do unless you’re budgeting.
In short, budgeting can be a great tool for improving your life now and even 30 years in the future.
