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Budgeting 101: How to Budget

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Budgeting 101: How to BudgetFew words in the English language invoke more dread and horror than the words “budget” or “budgeting.”  Some people would rather pluck their eyes out with a fork than learn how to budget.

Like it or not, budgeting plays a crucial role in any personal financial plan.  It is a means to ensure that our earnings are spent and saved in the way we want them to.  Budgeting helps us live within our means and accomplish our financial goals.

Budgeting Alternatives

You can create your own budget using a spreadsheet or even do it on paper.  It takes a fair amount of work and discipline to manually create and update such a budget, but it is possible.  Another manual budgeting option would be to purchase a paper and pencil budget kit, such as The Budget Kit: The Common Cents Money Management Workbook.

Alternatively, a number of companies provide affordable budgeting software that makes budgeting easy and even kind of fun (did I really just say that?).  I personally have used Quicken for years and would recommend it to anyone.

With the touch of a button I can manually download all of my credit card and bank account transactions, which I then sort into the appropriate budget categories I have previously set up.  It also allows me to balance all of my accounts each month, create personal financial statements, and has numerous other financial planning tools and capabilities.

There are a lot of other great options out there besides just Quicken.  Some of the other popular budgeting and money management alternatives I’ve seen include the following:

How to Create a Budget

1.  Track your cash inflows and outflows

Do this for a month or two to give you a realistic starting point for what to project for the future.  Create categories for the various inflows and outflows.

2.  Analyze the cash inflows and outflows

Ask yourself the following questions:

  • Are you spending more than what you are bringing in?
  • Where is wasteful spending occurring and how can you reduce your expenses?
  • Have you used BillCutterz to negotiate lower rates with all of your service providers (i.e. cable, Internet, insurance, utilities, etc)?  BillCutterz is able to save most people hundreds of dollars a year!
  • How can you increase your income?
  • How can you save more each month?
  • What would you like your actual earnings and spending to look like and what changes will you make to get there?

3.  Create a realistic budget for the future

Use the cash inflows and outflows you tracked as a starting point, and then adjust the various categories for any changes you plan to make going forward.

Monitoring & Updating the Budget

Once you have created a budget, continue to track your cash inflows and outflows each month and compare the results with your budget.  Comparing your projected budget to actual results each month will allow you to track your progress and make any necessary adjustments to achieve your goals.

How to Budget for Large or Infrequent Expenses

Many people struggle with budgeting for large or infrequent expenses and purchases.  They keep all of their money in one bank account, and if they don’t faithfully save for the future expense each month, the money may not be there when they need it.  Additionally, there is always the temptation to spend the money on something else.

An effective way to solve this common problem is to set up an online savings account or money market account for each major expense or savings goal you have

When your pay check is deposited in your checking account each month, you set up automatic transfers so that the appropriate amounts are transferred into each account.  The amount set aside for each future expense will vary depending on the amount of the expense and the amount of time until the payment is required.

It may be worthwhile to set up a separate account for future expenses such as the following:

  • property taxes
  • insurance premiums
  • vacations
  • vehicle purchases
  • estimated tax payments
  • large medical expenses
  • down payment on a home
  • car registration
  • holiday and birthday gifts
  • travel
  • weddings

By setting up multiple accounts, you will know exactly how much money you have saved for each goal and how much more you need to save.  If you have everything in one account, it’s tough to know how much really belongs to each goal.

Choose accounts that are FDIC insured, liquid, and that pay a decent interest rate.  Some financial institutions will even let you give a nickname to each account, which will help you keep track of what each account is for.

Many financial institutions make it surprisingly quick and easy to set up 5 – 10 accounts with automatic payments.

Final Tips on How to Budget

  • Make sure your budget is reasonable and realistic
  • Don’t live pay check to pay check–include some cushion in your budget
  • Build an emergency fund and food and water storage to protect you in case of a job loss or unexpected expenses
  • Make sure you are saving for goals such as retirement, down payment on a home, education or a vehicle, as appropriate
  • If you are in debt, make sure you are making payments to get out of debt
  • The more detailed and specific you are, the more accurate and useful your budget will be
  • Keep receipts for cash purchases
  • Since a budget includes investments and savings, your cash inflows should equal your outflows
  • Financial problems are generally a result of spending too much rather than earning too little.  However, both increasing your income and decreasing spending can give flexibility to your budget

For additional insights on how to budget, you might read the following book:

What tips do you have for learning how to budget?  How has budgeting helped your personal finances?  Leave a comment below!

Image: George Fairbairn/Bigstock


{ 1 comment… add one }

  • Tim November 18, 2012, 2:47 pm

    Thanks for the article. I’ve heard a lot of good things about Quicken before. I might just have to give them a try.


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