Creating a budget and sticking to it is a crucial part of meeting your goals. Budgeting brings up the idea of cutbacks and sacrifice, but it’s really about the opposite: having enough money to afford the things you want without building up debt. A classic budget consists of setting up spending categories, tracking your expenditures, monitoring your progress, making adjustments, plugging spending leaks, and staying motivated. There are different ways to achieve all of that, and you’ll find the one that works best for you. Your chances of being financially successful increase substantially once you put a budget in place. It takes a little time and effort to get started, but the rewards are tremendous.
Budget. For some, the word conjures up images of sacrifice, penny-pinching, and doing without. At least 50 percent of budgeting is mental, so if the word makes you shudder, focus on replacing this negative image with a positive one: A budget means being able to afford a new car, a dream vacation, and a stress-free retirement. If you haven’t been able to stick to a budget in the past, that budget system may not have been right for you. It all starts with a plan for every dollar you bring in, and knowing where you want that dollar to go. “Working after the fact” budgeting—looking back at where your money went last month—isn’t budgeting. A budget is all about the future.
A budget is really a money plan. Creating that plan is the first and most basic step you can take toward putting your money to work for you.
Many people who spend more money than they make don’t even realize they’re spending too much until they’re deeply in debt. Spending money without knowing how much you have available can create financial problems, especially when you’re using credit cards to cover your spending. Make mindful decisions about your spending by deciding in advance how you want to use your money instead of letting it happen accidentally. When you spend without a plan, you’re not in control of your money, and that can leave you with out-of-control money problems.
Budgeting and tracking your expenses show you where your money goes and how seemingly inconsequential daily or weekly expenditures can add up over time. By tracking all of your expenditures, you can make conscious decisions about how to spend, save, or invest your money. This can be the difference between never having enough money and being able to afford the things that are really important to you, such as saving for a down payment on a house, buying a new car, paying off credit card debt, planning for retirement, or saving for that trip to Cancún.
The Benefits of a Simple Lifestyle
The Millionaire Next Door by Thomas J. Stanley and William D. Danko shows that simple lifestyles, not big incomes, turn average people into millionaires. Many Americans buy a more expensive house than they can comfortably afford, drive the newest model of car, spend large sums on their wardrobes, buy all the latest electronic gadgets, and end up living paycheck to paycheck.
Having a working budget can greatly reduce the stress in your life that revolves around money issues. You’ll know what you can or can’t afford. You’ll feel confident that you’ll be able to pay your bills when they’re due, or you’ll have advance warning that there’s going to be a problem, giving you time to figure out a way to manage it.
A good spending plan is flexible and realistic. It’s a road map that offers alternative routes to your destination, depending on your personal road conditions. It should be dynamic, changing to fit your needs. If you don’t have kids, you wouldn’t use the same budget as someone who does; if you live in rented housing, you wouldn’t use the same budget as someone who owns his home. Life changes, and so should your budget.
The complexity level of a good budgeting system should match the level of your time and interest. Some people love recording the details. If you’re not one of them, choose a simpler approach so it’s not too much of a chore. The objective is to come up with a system you can live with for a long time.
It’s a good idea to create a worksheet to get started in setting up your budget. This book offers some help for doing that, but make sure the categories you use fit your personal lifestyle. Use the basic common categories that apply to everyone, such as housing, utilities, insurance, and food, but customize the other categories to fit your situation.
Your categories should be detailed enough to provide you with useful information, but not so detailed that you become bogged down in trivia. First, list all your sources of income, making sure to use the amount of money you actually get (take-home pay, for example, rather than gross pay):
Next, list the expense categories you want to track. Start out with a little more detail rather than a little less. You can always combine categories later if you find that expenditures in one category are so small they don’t warrant being tracked separately.
Some sample expense categories include:
Don’t forget things that come up throughout the year but are not monthly expenses, such as subscriptions, holiday gifts, birthday gifts, maintenance agreements, car repairs, and so forth.
Pay Yourself First
The first rule of personal finance is to pay yourself first. Make savings your number one expense category, with a set amount that you put aside monthly when you pay your bills. Don’t plan your savings around what’s left over once you’ve paid everything else. Chances are there won’t be anything left.
Think about your own personal habits (buying lunch at work, going out for drinks with friends) or hobbies you engage in (woodworking, skiing, boating, golfing, gardening) to identify other spending categories. Some of your spending habits might surprise you when you see them in black and white. That’s okay. Identifying them just brings them to light so you can make a conscious decision about your spending. The purpose of budgeting is not to make you feel bad or guilty about how you spend your money. It’s to make sure you have the money available to spend on the things you want.