A simple budget can help you spend more wisely
You can't get your spending under control if you don't know what you're spending your money on.
That's why our simple, easy to use budgeting system can make a big difference in your life.
This isn't about putting a ball and chain around your wallet.
It's about making sure that you spend your money on the things that matter most, whether it's an adventurous vacation, fashionable clothing, or a cup of Starbucks coffee on the way to work every morning.
It's about being able to spend your money without feeling guilty and constantly worrying about whether you can afford it because you know you can.
And here's another surprise -- you're already budgeting and don't know it. Every time you get paid and sit down to write out checks for the bills, that's budgeting at its heart. You simply lack an organized, formal plan.
Here's what to do:
Step 1. Create your budget
Get a notebook and at the top of the first several pages create general categories for the major ways you spend your money.
Here are eight categories we suggest you begin with:
- Children (if you have them)
- Personal Care
Now skip a page, label the next one as "Income.'' Believe it or not, you're good to go.
If you are more comfortable working on a computer, you can use a spreadsheet to do the same thing. Make a column for each of the spending categories skip a column and then create an "Income" column.
You can also find free, downloadable forms on the Internet or purchase an inexpensive kit to help you set up the categories at places such as www.homemoneyhelp.com. Don't spend hundreds of dollars on complex budgeting software with a lot of bells and whistles you don't need. This is supposed to be a simple system.
Step 2. Start tracking your spending
On the first of the month begin writing down everything you spend, the date you spent it, and who you paid, under one of those seven categories. This is a little like recording the checks you write in a checkbook except that you're going to keep track of everything you spend, including cash and credit card expenditures.
Get in the habit of saving receipts for everything you buy, no matter how big or how small the purchase might be, and entering those purchases in your budget every night or every couple of nights. Be sure and record how much you spend on monthly bills, too.
Here is how we would categorize some typical monthly expenditures:
- Rent or mortgage
- Homeowners or renters insurance
- Property taxes
- Gas and electric bills
- Telephone and cable bills
- Furniture and appliances
- Car payments
- Auto insurance
- Train or bus passes
- Medical bills
- Prescription and nonprescription medicine
- Glasses or contacts
- Gym memberships
- Child care
- School expenses
- Extracurricular classes and organizations
- Dry cleaning
- Hair cuts and styling
- Movies and concerts
- Hobbies (golf, scrapbooking, dance lessons)
- Books, magazines and newspapers
- Charitable giving
- Life insurance
- Student loan payments
- Previous credit card balances
- Professional organization dues
A few tips:
- We are looking at how you spend your take-home pay, so don't include anything that comes out of your paycheck, like taxes, payments to 401(k) retirement plans and health insurance premiums.
- Be careful not to count credit card payments twice. Count those expenses when you make the purchase, not when the credit card bill comes in.
- Be flexible and intuitive. Create categories that fit your life. Don't agonize over where to put a particular expense.
Step 3. Start tracking your income
Record all of the money you have coming in on the income page. Note the date you received it, who paid you and how much. Use the actual amount of your paycheck, after all the deductions are taken out. Include tips and small, non-recurring income like gifts from mom. Don't include big non-recurring checks, like a tax refund. That should be used to pay down big debts or build a rainy-day fund. It shouldn't be part of your day-to-day spending.
Step 4. Total your spending and income
At the end of the month total up how much you spent on each page. Then remember the page you skipped, the one between your spending records and income page? Transfer what you spent in each category to that blank page and add them all up to get your total expenditures. Next add all of your income together.
Step 5. Calculate the bottom line and act accordingly
Subtract your total spending from your total income. If you spent more than you made, use your records to see where the money was going and look for ways to cut back that don't affect the things you think are most important. If dance classes are the highlight of your week, don't cut them out. Indeed, maybe you'd like to take two dance classes. Use your spending record to see what you could easily do without to free up money for that new class.
Step 6. Do it again
Create a new budget for the new month and see if you can change your spending habits. Imagine how satisfied you'll feel when you succeed.
You'll have taken a big step towards controlling a critical part of your life.
Your income doesn't have to exceed your spending every month, especially if your have a big, one-time expense. Making up the difference is why we have savings. But your income should exceed your spending most months, and this is a big step towards making that happen.