How To Budget Your Money
Yes, You Do Need a Budget
Of course, the reasons for needing a budget vary widely, but
FreeMoneyFinance.com has helped us build a list of the top five motivating factors.
# Budgets are essential for setting and fulfilling goals. Without setting boundaries for yourself and keeping tabs on your spending, you will not be able to track your progress.
# Financial planning enables you to build personal wealth.
# Monitoring your spending will allow you to stay out of debtand maybe even save for the future.
# A budget allows you to fulfill your needs and wants with a limited set of resources.
# Budgeting is just plain old character building.
Get Started
The hardest part of sketching out a budget for yourself is to figure out where you should even begin. Most people naturally assume that they should just dive in and set up limits for themselves, but this can lead to frustration and failure. Instead, make sure you have the full picture and enough data to allow you to make an informed decisionyou wouldn't buy a car without researching some facts and figures first, would you?
# '''Track Your Spending''': Keep a list of your actual expenditures for a full month and ''be specific'': keep your receipts and itemize your purchases. (While it isn't necessary to be a receipt hoarder forever, it is important to get an accurate depiction of your expenses as soon as possible.) If you need help with your checking account, see our guide on
How to Balance Your Checkbook.
# '''Outline What's Most Important''': Make a list of your regular expenses: everything you need to pay for each month, such as rent/mortgage, utilities, transportation costs (include gas money, car/insurance payments, and maintenance), outstanding debt, food and groceries, insurance, school supplies, and so on.
# '''Reality Check''': Compare your proposed spending to your actual spending and examine the results. You may find some surprises, like how much money you spend on takeout or
Starbucks coffee.
Decision Time
Once you see your spending habits laid bare, you'll be in a good position to make changes and prioritize.
* '''Living Beyond Your Means''': If you're spending more than you're earning, it's time to make some cuts. Can you downgrade your cable TV package? Do you really need that latest gadget or pair of shoes? Can you use generic items rather than name brands? Decide on a specific amount to spend on variable expenses, and hold yourself accountable. For more information about reducing your expenses, see
WikiHow.com.
* '''Breaking Even''': If your income and your expenditures are just about the same, you may think you're fine now, but what about if your car needs a new transmission? Or you find yourself with an unexpected medical expense? You will want to build some cushion into your budget so unforeseen setbacks don't put you in debt.
* '''On Track''': If you are spending less than you're making, you're in a good place; nonetheless, there is room for improvement just the same! Leftover funds should be split into a few groups:
** '''Flex Money''': You should keep about 10-20% of your regular expense allocation available just in case your regular expenses end up costing more than you thought.
** '''Savings''': Anywhere between 10-30% of your paycheck should be reserved for savings and investments. Many banks will allow you to set up automatic payments to help out with this: for example, the account where your earnings are deposited will transfer funds to a savings account every two weeks. One fewer thing to worry about!
** '''Spending Money''': Money set aside for clothes, restaurants, bars, gifts, and so on.
CNN.com recommends dividing your income in the following way, but it really depends on your priorities and financial situation.
Build Your Budget
Now it's time to create your plan, and you have a number of options for this.
* '''Old School''':
Pen and paper. This is a good solution for those who want access to their budget when they're off the grid, or for folks who are simply leery of computer crashes.
* '''The Standard''': Standard financial planning software, like
QuickBooks, or
YNAB (You Need A Budget).
* '''New Age''': Portable online software like
Mint.com (especially great because it alerts you if you overspend in any given area), or financial communities like
Wesabe.com.
Put all of your expenses into a spreadsheet. We'll assume you're using Excel and propose a suitable layout.
The beauty of a well made budget is that you can pinpoint areas where you're spending an exorbitant amount of money, and make life adjustments accordingly. So if you are spending way too much money at the pump, take the bus. If you are spending hundreds of dollars a month at coffee shops, make some home-brew.
Financial Planning Tips
* Make sure you know what you're worth. Software like
Salary.com will help you gauge if you're being paid appropriately, and if you find that you're under the local average, see if you can negotiate a raise at work.
* Put your savings out of reach. You can set up separate accounts at your banks: for instance, one for savings and one for fun money (a great tip is to set up ATM access ''only'' for your spending money account); you could also withdraw your pocket money in cash each month and then only use your debit/credit cards for regular expenses.
* Ain't technology great? Free and/or cheap
computer programs like Quicken and Excel allow you to make automatic spreadsheets and charts so you'll have an organized idea of your budget.
* Most banks allow you to
credit cards automatically so you won't have to worry about forgetting.
* Set up a retirement plan, like a 401(k) or a Roth IRA. This money is taken out of your paycheck automatically, so you'll be saving without even realizing it.
Teach Your Kids Smart Financial Planning
It's important to teach your children smart financial planning before you give them any spending power.
expense report.
Related Guides
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Money and Rent Receipts
Related Guides
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Money and Rent Receipts
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How to Balance Your Checkbook
