Friday, January 06, 2006
How to Make and Keep a Budget That Works
We have now decided that in order to meet our personal finance goals, we need to plan how we use and spend our money. A budget is the best way to do this, as it allows you to plan out all of your purchases for a predetermined period, while ensuring that you can add the amount of money to your savings that you require to meet your financial goals. To complete a formal budget you require very simple math skills, and can even create your budget easily on a spreadsheet program like Microsoft Excel.
The first thing you should realize when making your own budget is that there is no proper allocation of one’s income that makes sense for everyone. Do not focus too much on ensuring each category of budget meets a predetermined percentage of your income. The point of this budget is that it is totally realistic and will allow you to meet your personal financial goals. This means that you need to be well aware of what is a realistic amount of money for you to allocate for each category in your budget. The best way to ensure that your budget is practical is to monitor all of your spending for a time period (at least two weeks but the longer the better). It would help to carry a journal, and write down every single purchase made during this period. You should categorize the purchases into easy to identify categories, which will cover every possible expense or purchase you can have. There is a good outline of 11 categories to use at this about.com Making a budget site, http://frugalliving.about.com/cs/budgeting/a/010201_2.htm.
While you can use your test period as a gauge for what you think you should allocate for some categories (like food and entertainment), you should rely on past bills, receipts and other records to determine a more accurate portrayal of your spending in each category on a monthly basis. While simple averages are useful for most categories (as in adding all of the individual totals together in one category and dividing by the number of different totals to get the average) you should always be aware of seasonal differences. For example, in the winter your heating will cost much more than it would in the spring. Staying aware of these types of differences on a monthly basis will allow your budget to be more realistic and allow you to stick closer to your financial plan.
Now it is time to actually fill-in each category. This can be done using a pencil and calculator, on a spreadsheet program, or even online using online calculators like this one http://www.ed.gov/offices/OSFAP/DirectLoan/BudgetCalc/budget.html (just remember to include savings as an expense). The goal with any budget is to allocate your money to every category, so you have no money left over when you minus your income from all of your expenditures (which includes savings). If you find that you have a surplus of money left over after creating your budget, then you are in luck. You can either determine to allocate some more money to individual categories, or just put the money directly into your savings category or emergency funds. Doing this ensures that you are better prepared for any unexpected financial purchases or problems that may need to occur in the future. If you are lucky though you will just be able to increase your savings faster, allowing you to realize your personal finance goal sooner than you originally imagined. If you find that your income minus your expenses yields a negative number, then you still have some work to do. This means that your current income is not able to pay for all of your expenses, and you will need to go into debt to fulfill all of your desires. The only way to change this is to either increase your income or decrease your expenses. Your income can be increased in a number of ways. You can take on more hours at your job, find other part-time employment, or sell some items that you have that you no longer use. These suggestions are obviously not suitable for everyone (especially if you already work full time at a career), but you should always stay open-minded to opportunities that may exist to raise your income. Lowering your expenses is likely your best option, however it will likely be difficult to do. You need to really consider what you are able to sacrifice, or what changes you can make to lower your expenses. I will in the future provide plenty of tips of how to save your money and lower your expenses, but for now I will leave you with just a few tips.
· Turn down the heat (or raise the temperature in the summer) when you are not at home. Also wear extra layers in the winter instead of raising the heat
· Make lunches at home. Not only can this be much healthier, but also you can save a lot of money
· Look in local free newspapers for free events and shows in your area to help keep your entertainment costs down. Use your local library to rent movies and books. Just make sure to return everything on time to avoid late chargesIt is important to keep monitoring your spending throughout the month to ensure you are staying aligned with your spending goals. While a budget may seem rather intimidating to start and maintain, it really becomes rather easy to follow once you get the hang of it. Besides, even if you have trouble sticking to it exactly at the beginning, at least you have started to take steps to make financial changes in your life and you will soon begin to experience the benefits of this. The most important thing is to always remember what your financial goal is, as this will keep you strong enough to avoid the temptations of frivolous and impulsive purchases.
The first thing you should realize when making your own budget is that there is no proper allocation of one’s income that makes sense for everyone. Do not focus too much on ensuring each category of budget meets a predetermined percentage of your income. The point of this budget is that it is totally realistic and will allow you to meet your personal financial goals. This means that you need to be well aware of what is a realistic amount of money for you to allocate for each category in your budget. The best way to ensure that your budget is practical is to monitor all of your spending for a time period (at least two weeks but the longer the better). It would help to carry a journal, and write down every single purchase made during this period. You should categorize the purchases into easy to identify categories, which will cover every possible expense or purchase you can have. There is a good outline of 11 categories to use at this about.com Making a budget site, http://frugalliving.about.com/cs/budgeting/a/010201_2.htm.
While you can use your test period as a gauge for what you think you should allocate for some categories (like food and entertainment), you should rely on past bills, receipts and other records to determine a more accurate portrayal of your spending in each category on a monthly basis. While simple averages are useful for most categories (as in adding all of the individual totals together in one category and dividing by the number of different totals to get the average) you should always be aware of seasonal differences. For example, in the winter your heating will cost much more than it would in the spring. Staying aware of these types of differences on a monthly basis will allow your budget to be more realistic and allow you to stick closer to your financial plan.
Now it is time to actually fill-in each category. This can be done using a pencil and calculator, on a spreadsheet program, or even online using online calculators like this one http://www.ed.gov/offices/OSFAP/DirectLoan/BudgetCalc/budget.html (just remember to include savings as an expense). The goal with any budget is to allocate your money to every category, so you have no money left over when you minus your income from all of your expenditures (which includes savings). If you find that you have a surplus of money left over after creating your budget, then you are in luck. You can either determine to allocate some more money to individual categories, or just put the money directly into your savings category or emergency funds. Doing this ensures that you are better prepared for any unexpected financial purchases or problems that may need to occur in the future. If you are lucky though you will just be able to increase your savings faster, allowing you to realize your personal finance goal sooner than you originally imagined. If you find that your income minus your expenses yields a negative number, then you still have some work to do. This means that your current income is not able to pay for all of your expenses, and you will need to go into debt to fulfill all of your desires. The only way to change this is to either increase your income or decrease your expenses. Your income can be increased in a number of ways. You can take on more hours at your job, find other part-time employment, or sell some items that you have that you no longer use. These suggestions are obviously not suitable for everyone (especially if you already work full time at a career), but you should always stay open-minded to opportunities that may exist to raise your income. Lowering your expenses is likely your best option, however it will likely be difficult to do. You need to really consider what you are able to sacrifice, or what changes you can make to lower your expenses. I will in the future provide plenty of tips of how to save your money and lower your expenses, but for now I will leave you with just a few tips.
· Turn down the heat (or raise the temperature in the summer) when you are not at home. Also wear extra layers in the winter instead of raising the heat
· Make lunches at home. Not only can this be much healthier, but also you can save a lot of money
· Look in local free newspapers for free events and shows in your area to help keep your entertainment costs down. Use your local library to rent movies and books. Just make sure to return everything on time to avoid late chargesIt is important to keep monitoring your spending throughout the month to ensure you are staying aligned with your spending goals. While a budget may seem rather intimidating to start and maintain, it really becomes rather easy to follow once you get the hang of it. Besides, even if you have trouble sticking to it exactly at the beginning, at least you have started to take steps to make financial changes in your life and you will soon begin to experience the benefits of this. The most important thing is to always remember what your financial goal is, as this will keep you strong enough to avoid the temptations of frivolous and impulsive purchases.
# posted by mikeyarmo @ 3:41 PM 
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