Planning your spending helps you manage your money more effectively.
If you take a list of what you need with you when you go to the supermarket or the hardware store, you can shop more efficiently. And if you have a sense of what you're willing to spend, you can often save money, too, especially if you stick to your list.
Using a budget can have similar positive results for your overall household and personal spending. It means you have a plan for how you're going to spend the money you have coming in.
WHAT YOU SPEND
As the first step in budgeting, make a list of your expenses, dividing them into the following categories:
- Fixed monthly expenses, which include mortgage payment or rent, car payments, installment loan payments, including student loans, and insurance. If you pay for insurance quarterly or annually, convert the cost to a monthly amount. Do the same for property taxes if they're not included in your mortgage payment.
- Variable monthly expenses, which include food, clothing, utilities, transportation, credit card charges, contributions, and medical expenses.
- Incidental expenses, which include everything else you spend. To document what you spend, you probably have checks or credit card receipts for some or all of your fixed and variable expenses. To figure out the rest, including incidentals, keep careful track of everything you buy with cash or a debit card for a month or six weeks. What you discover may surprise you.
WHAT YOU EARN
The other half of the budget equation is figuring out your monthly income. List all your sources of income, including salary or wages, investments, rental property, alimony and child support, as well as Social Security and pension payments if you receive them.
WHERE YOU STAND
Next, compare what you're spending each month with your income. If those amounts come out even, or if you have more income — even a little more — than what you're spending, you have your finances under control. What making a budget can do for you is help you find ways to use your money more effectively, freeing up more to save and invest.
If your spending outpaces your income, you've either got to reduce your expenses or increase your income to bring the two into balance. Otherwise you'll find yourself in financial trouble.
MAKING A SPENDING PLAN
If you want to save more, be able to afford more of the things that are important to you, or get your spending under control, you need to analyze not just what you're spending but where you're spending it and make a plan for how you'll spend your money in the future.
To help get started, think about the answers to the following questions. It might help to write down your responses.
- Which expenses are essential and which ones have to go, at least for now?
- Can any of the essential expenses be reduced?
- What's a realistic reduction?
Next, project your spending for the next 12 months, subtracting what you estimate you can save from what you're spending now in each budget category. For example, unless you move, you probably can't reduce the fixed amount that you're spending on rent or mortgage. You have to make your car payments, too. But if your records show you've been spending an average of $500 on food each month, can you reduce that by 10%, or $50? Can you get your transportation costs down, or what you're spending on utilities?
KEEPING TRACK
As the months go by, keep careful records and compare your actual expenses to what you budgeted. Remember that a budget is not carved in stone. It's a working model.
You can reduce your spending in a category where you're running over the amount you anticipated or rearrange what you've allotted to various categories to reflect what's really happening. For example, food may cost more than you planned but you've figured out a way to spend less on phone or electric bills.
You just want to be sure that you keep what you do spend in line with the total you have available to spend.
FINDING WAYS TO CUT BACK
What's the most effective way to realize the savings you believe you can produce?
The most personal and the most difficult part of budgeting is finding ways to reduce your spending. What works well for a relative or friend may not work for you, in part because spending is linked to personal priorities.
For example, if your housing costs eat up a large portion of your budget, you might be able to move to a less expensive home. But if you are happy where you are, your children are doing well in school, and you can catch a bus to work just a block away, you may decide to economize some other way.
But most people, if they look, can find ways to spend less on certain things. Could you still have a good time if you cut your entertainment budget by 15% or more? If that seems extreme, try 10%. Could you carpool to work?
MOVING AHEAD
Budgeting isn't a one-time exercise. It's important to make monitoring your cash flow an ongoing process, by keeping records, either electronically or on paper, and making adjustments to your budget or spending.
It can be frustrating that following a budget doesn't guarantee you'll be able to afford everything you'd like to have, especially in the short term. But if you're serious about living within your means and diligent about spending carefully, you're much less likely to get caught in a serious financial trap.
On the brighter side, when your finances are in the black, you can start to make progress toward your goals, first by building an emergency fund to cover unexpected, and unbudgeted, expenses and then by allocating a percentage of your income to savings and investment accounts.
© 2010 Lightbulb Press, Inc. All Rights Reserved.
