Money ManagementSaving

Manage Your Finances with a Personal Budget Plan That Works for You

Establishing a budget is the act of deciding how much of your money you’re going to spend on one item, how much on another, and so on, before you’re actually in the position of spending the money. Sticking to a budget is the act of following through on those decisions. Creating a budget isn’t easy, but sticking to any budget is extremely difficult.

The trick is to focus on the word REALISTIC. It doesn’t take much research or many difficult decisions to decide that you’re going to spend $200 per month on food. But if you’ve never spent less than $500 per month on food, you’ll blow your budget right out of the water the first week. Instead, before you begin deciding on the numbers in your budget, you’ll need to fully assess your current situation, take a hard look at where you can cut back your financial obligations (both large and small), restructure your debt (if necessary), and see whether you can add income.

Only then are you ready to decide realistically where every penny will be spent. A budget is a tool, and like all tools, the results you get from it will be determined by how you use it. If you make a realistic budget and stick to it, you can watch your life move forward. If you set unrealistic budgetary expectations and don’t even bother to follow through with them, don’t think your financial problems are over.

Setting Budgetary Goals

Used correctly, a budget doesn’t restrict you; it empowers you. You’re going to establish a budget because you have financial goals that are not being met. For example, you may want to:

  • Be able to pay all your bills from your paycheck—and maybe have a little left over
  • Buy your first house
  • Save for retirement but can’t seem to find any extra money to get started
  • Pay off all your credit cards and never get into debt again
  • Give more money to your church or to other nonprofits
  • Be your own boss
  • Take a vacation
  • Stop hearing from the hospital about your medical bills
  • Buy a new—or at least newer—car
  • Stay home with your baby
  • Remodel part of your house
  • Pay for laser eye surgery
  • Finance at least part of your child’s college education
  • Buy health insurance
  • Rebuild your credit
  • Find a way to care for your aging parents
  • Finally build your dream house
  • Take a leave of absence from your job to work in the Peace Corps
  • Go back to school and begin a new career
  • Buy the downtown coffee shop when the current owners retire
  • Get a whole new wardrobe

Are any of these your goals? If so, budgeting will get you there, even if the odds seem impossible right now. Even if you’re stuck in a job you don’t like, desperately want to go back to school, have to take care of an aging parent, and have $19,000 in credit card debt, you can meet your financial goals—just as others have done before you. With a good budget, a little patience, and a whole lot of determination, you’ll eventually get there.

What Do You Need to Create a Budget?

You might be tempted to answer this question with something clever like “money.” But if you do that, you’re missing the point. Creating a budget isn’t about having money; it’s about figuring out what you’ve got, what you’re spending it on, and how you can realize your dreams.

In order to do this, you’ll need some basic tools.

A Computer

Of course, people made budgets in the days before computers, and you can still make a perfectly good one, sitting at the kitchen table with a pencil, a pad of paper, and a calculator. But why not do things the easy way? If you have a good, working computer, put it to work for you. Create a folder marked “Budget” (or something similar) so you know where all your files are going to go. If you have thoughts about your budget and about ways you can save money or extra sources of income you forgot about, note them down and toss them into the “Budget” folder. That way, they’ll all be centralized, and you can get at them easily.

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One note of caution here: you’re going to be putting down in written form a lot of confidential information—not your password to your online banking account or something obvious such as that, but certainly information about your finances that you might not want other people to see. Make sure your computer’s security systems are strong. If possible, create a password protection for your “Budget” folder so only you (or anyone else you authorize) can get into it. Remember, these are your dreams we’re talking about. You don’t want anything to get in their way.

The Right Software

There are all kinds of financial software programs out there, each one
claiming that it’s the only one you need. I won’t recommend any one of them in particular, although if you decide to use one, get a clear idea before you buy it of what it’s offering. After all, you’re inaugurating an era of responsible spending, so you don’t want to purchase something that isn’t exactly what you want or need.

On the other hand, you can bypass all those bright, shiny programs and just do the work and construct the spreadsheets yourself. It’s not hard—as you’ll see in the following pages—and if you have a quality spreadsheet program such as Microsoft Excel, you’ll be in good shape.

Spending and Income Records

One goal you’re going to accomplish as you go through this book is keeping accurate and careful records of your expenses and income. However, it’s possible that you’ve not been doing that up to now.

Assemble all your bills in one place, possibly in a folder or other container so you won’t lose any of them. At your local office supply store, you can find expanding accordion folders, each slot marked with the name of the month. These are great for keeping bills, since you can file them as they come in based on when they’re due. In a separate folder or box, keep your pay stub records.

This applies whether you’re paid with physical checks or through direct deposit into your bank account. You need to see exactly what’s coming in and when you’re receiving it. Keep the stubs in the order in which you receive them. Also in this folder, keep stubs of any other checks you receive (tax returns, gifts, etc.) These records are essential both for budgeting and for tax purposes.

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Most financial advisers recommend keeping your financial records for at least three years. This doesn’t need to be a huge burden; just make sure you keep them sorted and somewhere you can have easy access to them if you need them. When it comes time to get rid of them, I strongly recommend purchasing an inexpensive shredder from an office supply store and shredding them. This way you minimize the possibility of identity theft.

The Right Software

There are all kinds of financial software programs out there, each one claiming that it’s the only one you need. I won’t recommend any one of them in particular, although if you decide to use one, get a clear idea before you buy it of what it’s offering. After all, you’re inaugurating an era of responsible spending, so you don’t want to purchase something that isn’t exactly what you want or need.

On the other hand, you can bypass all those bright, shiny programs and just do the work and construct the spreadsheets yourself. It’s not hard—as you’ll see in the following pages—and if you have a quality spreadsheet program such as Microsoft Excel, you’ll be in good shape.

One of the ironic consequences of the growth of technology has been that it’s easier for people to obtain illegal access to your records. There are a lot of things you can do to protect yourself against this (see How to Survive Identity Theft by David H. Holtzman, Adams Media, 2010), but one of the most important ways is to shred your personal documents rather than just throwing them away. This particularly applies to old, expired credit cards. Never just throw them away. Shred them or, minimally, cut them into very small pieces. There’s no reason to give identity thieves a helping hand.

A Quiet Place to Work

You’re about to embark on one of the most important things you can do to realize your hopes and dreams. This is big. It’s important. And to do it right, you need some peace and quiet. Constructing a workable budget is something that takes concentration and hard thought.

It’s not easy to find those things in a room filled with shouting children, barking dogs, meowing cats, and a spouse who wants help with a clogged dishwasher drain or finding where the tie is that he threw across the back of a chair last Thursday. Pick a time when you’re going to be alone. Find a place that’s comfortable and away from the tumult of your daily life.

If you like, put on some nice background music or sounds; you’ll make better decisions when you’re relaxed. As mentioned above, you’re going to need an effective storage system for your income and spending records. Make sure they won’t be disturbed or accidentally thrown out. Make clear to members of your family that what you’re doing is important; after all, their dreams are at stake too. All right. Got everything? Relaxed? Right. Here we go.

Creating a budget

Most people need some way of seeing where their money is going each month. A budget can help you feel more in control of your finances and make it easier to save money for your goals. The trick is to figure out a way to track your finances that works for you. The following steps can help you create a budget.

Step 1: Calculate your net income

The foundation of an effective budget is your net income. That’s your take-home pay—total wages or salary minus deductions for taxes and employer-provided programs such as retirement plans and health insurance. Focusing on your total salary instead of net income could lead to overspending because you’ll think you have more available money than you do. If you’re a freelancer, gig worker, contractor or are self-employed, make sure to keep detailed notes of your contracts and pay in order to help manage irregular income.

Step 2: Track your spending

Once you know how much money you have coming in, the next step is to figure out where it’s going. Tracking and categorizing your expenses can help you determine what you are spending the most money on and where it might be easiest to save.

Begin by listing your fixed expenses. These are regular monthly bills such as rent or mortgage, utilities and car payments. Next list your variable expenses—those that may change from month to month, such as groceries, gas and entertainment. This is an area where you might find opportunities to cut back. Credit card and bank statements are a good place to start since they often itemize or categorize your monthly expenditures.

Record your daily spending with anything that’s handy—a pen and paper, an app or your smartphone, or budgeting spreadsheets or templates found online.

Step 3: Set realistic goals

Before you start sifting through the information you’ve tracked, make a list of your short- and long-term financial goals. Short-term goals should take around one to three years to achieve and might include things like setting up an emergency fund or paying down credit card debt. Long-term goals, such as saving for retirement or your child’s education, may take decades to reach. Remember, your goals don’t have to be set in stone, but identifying them can help motivate you to stick to your budget. For example, it may be easier to cut spending if you know you’re saving for a vacation.

Step 4: Make a plan

This is where everything comes together: What you’re actually spending vs. what you want to spend. Use the variable and fixed expenses you compiled to get a sense of what you’ll spend in the coming months. Then compare that to your net income and priorities. Consider setting specific—and realistic—spending limits for each category of expenses.

You might choose to break down your expenses even further, between things you need to have and things you want to have. For instance, if you drive to work every day, gasoline counts as a need. A monthly music subscription, however, may count as a want. This difference becomes important when you’re looking for ways to redirect money to your financial goals.

What is the 50/30/20 rule?

The 50/30/20 rule is a budgeting technique that divides your take-home income into three categories by percentages. It’s a simple way to track your spending. Here’s the breakdown:

Rent or mortgage
Car payment

Streaming services

Savings or Debt

Emergency fund
Child’s education
Credit card payments

Step 5: Adjust your spending to stay on budget

Now that you’ve documented your income and spending, you can make any necessary adjustments so that you don’t overspend and have money to put toward your goals. Look toward your “wants” as the first area for cuts. Can you skip movie night in favor of a movie at home? If you’ve already adjusted your spending on wants, take a closer look at your spending on monthly payments. On close inspection a “need” may just be a “hard to part with.”

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If the numbers still aren’t adding up, look at adjusting your fixed expenses. Could you, for instance, save more by shopping around for a better rate on auto or homeowners insurance? Such decisions come with big trade-offs, so make sure you carefully weigh your options.

Remember, even small savings can add up to a lot of money. You might be surprised at how much extra money you accumulate by making one minor adjustment at a time.

Step 6: Review your budget regularly

Once your budget is set, it’s important to review it and your spending on a regular basis to be sure you are staying on track. Few elements of your budget are set in stone: You may get a raise, your expenses may change or you may reach a goal and want to plan for a new one. Whatever the reason, get into the habit of regularly checking in with your budget following the steps above.

How To Use Your Budget

After you have set up your budget, you must monitor and continue to track your expenses in each category, ideally every day of the month. The same budgeting spreadsheet or app used to make your budget can also be used to record your expense and income totals.

Recording what you spend throughout the month will keep you from overspending and help you identify unnecessary expenses or problematic spending patterns. Take a few minutes each day to record your expenses, rather than putting it off until the end of the month. 

If you’re not confident that you can budget your money, adopt the envelope system where you divide cash for spending into separate envelopes for different spending categories. When an envelope becomes empty, you’ll have to stop spending in that particular category.

As you use your budget, keep an eye on how much you have spent. Once you have reached your spending limit in a category, you will either need to stop that type of spending for the month or move money from another category to cover additional expenses.

Your goal in using your budget should be to keep your expenses equal to or lower than your income for the month.

Review and Tweak Your Budget

Circumstances change. Our priorities shift, we change jobs, we move, we have children. Make an appointment with yourself every few months to sit down with your budget and make sure it’s working for your current goals and realities.

If you’ve already got your numbers plugged into a program or website, it’s easy to play around with your budget categories to see where you can create extra room or prioritize one thing over another.

Remember, your budget needs to work for you, not the other way around.

More Budgeting Tips

Once you have set up a basic budget, customize it according to your financial situation and goals. Below are several tips and things to consider:

  • If you work on commission, be aggressive in saving to help cover periods when the market is slow. 
  • If you have cash flow issues because you are paid only once a month, divide that payment by weeks, and keep the cash you planned to spend in remaining weeks in a separate account until you need it.
  • Pay with a credit card only if you will have the money to pay it off at the end of the month. Otherwise, you will owe interest on top of the price of whatever you bought.
  • Adjust your budget monthly if you find you overestimated or underestimated your expenses. Keep an eye on large expenses that only occur every few months, such as insurance payments.
  • If you tend to overspend in certain categories, use budgeting hacks such as switching to a cash-only budget.
  • Once your expenses are lower than your income, budget towards savings goals before you increase your spending.
  • Take time to learn other financial skills to improve your financial literacy and make your money work harder for you.

Originally posted 2022-04-13 11:47:55.

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