Financial experts of all stripes tell us to have a budget. But even with this knowledge in mind, many people still don’t have one. How could that be?
Let’s face it, budgeting is kind of hard—you’re trying to implement a system for tracking your expenses, and since you’re probably spending by check, debit and credit cards, and cash, keeping it all in order can be a challenge. And they don’t teach personal budgeting in school either, so how do you learn?
If you want to have a personal budget of your own, all you need to do is follow a few steps, some easy, some not so easy.
In this article
Add up your income and expenses for the past 12 months
You could take a short cut here and track your income and expenses for three months, but that doesn’t give a clear view of the big picture. You could go a few months with very low (or very high) expenses that will distort your budget numbers. Best to cover a full 12 months so you’ll know exactly what’s going on.
Assemble your checkbooks, credit card statements and major cash receipts, then summarize them by category. For example, you’ll want to segregate groceries, insurance, utilities, restaurant meals, entertainment, gas, car repairs, housing payments and any other recurring expenses.
You’ll want to do the same with your income. Sure, you could just look at your W2 form your monthly income, but most of us know the wide difference between gross and net income. The net is what you’re working with, and this becomes even more important if you have several income sources.
Isolate and analyze where most of your spending is happening
Once your expenses have been separated by category, you should add them up so that you have totals for each expense category.
One of the most important aspects of having a budget is that it enables you to identify where most of your spending is taking place. Many people are stunned to see how much they actually pay for certain expenses, and that only becomes apparent when you summarize them for an entire year.
Find expenses that you can cut
Your biggest expenses will also be the riches sources of budget savings. They’re the biggest so that’s where you’ll have the most room to cut.
Some large expenses, like housing, aren’t easy to cut. But if you find that you’re spending a lot of money on food, entertainment or utilities, you should further analyze that spending to look for ways to cut spending. For example, is there a less expensive way to have cable TV or cell phone service? Should you be clipping more coupons or buying more food on sale? Should you cut restaurant meals from twice a week to twice a month?
A budget, with summarized expenses will show you exactly where to do it.
Allocate budget savings to savings and investments
Knowing where you’re spending your money is the first step to having a budget, but what you do with that information is what’s even more important. The idea is to cut
expenses then redirect your income into categories that are in line with your long term financial plans.
If you have debt you need to pay, you can begin directing budget savings into making larger payments. If you want to save more money, either for emergencies, college for your children, or retirement, you can direct your budget savings into those accounts. The key is that you redirect the money from spending and into either debt payoff or savings accumulation. Not only will that enable you to pay debt or increase savings, but it will also reduce the amount of money you have for other spending. That’s the power of a budget—creating a financial direction and enabling you to follow it.
Automate your budget with money management software
If you decide that keeping your budget manually is too much work—and for many people it will be—there is an alternative. There are automated budget systems, often referred to as “money management software”, that can work for just about anyone. The key is finding the best money management software for your own personal preferences and comfort level.
There are dozens of software systems to choose from, with updated modifications and new packages arriving all the time.
In fact there are some blogs, such as One Money Design that discuss the topic of money management software on a regular basis, and are worth checking out from time to time. There are always new budgeting software packages coming on the market, all at different prices and with varying capabilities to suit your needs.
Whether you use money management software tool, or do it old school with paper and pencil, the important thing is to develop and work within a budget. Once you do, you’ll not only have greater control over your spending, but you’ll also gain greater ability to save and invest your money. The sooner you can do this, the sooner you’ll reach the financial independence you’re hoping to hit.
Are You Still Working Without a Budget? is a post originally published on: Everything Finance – Its all about Money!