A Beginner's Guide to Budgeting Success
by Kim Randall
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One of the primary keys to financial success is budgeting. A budget acts like a roadmap to your financial future. Without a good one, it may be very difficult for you to reach your desired destination.
Get the Facts
The best place to start with your budget is to assess where you currently are. If you have been saving your receipts or recording them using software such as Mint.com, you are off to a good start. If not, don't worry. Just be diligent in recording all of your expenses for the next 90 days to give you a rough estimate of your spending habits.
Next, separate your expenses by category and calculate a monthly average for each. Add them up and compare the total to your average monthly income. Do you have a lot of breathing room or are you just scraping by? Chances are that even if you end up with a positive balance at the end of the month, you will find that some areas need to be trimmed down a bit.
One of the biggest pitfalls in working with a budget is being overwhelmed with all of the information. Budgeting is about making your money work for you, so you want this to be an enjoyable process (or at least not a highly stressful one!). Therefore, it is important to start by focusing on just a couple of key "problem" areas and fine-tuning your results from there.
Review your monthly expenses and see if any areas seem out of sync with the others. Is your dining expense twice that of your grocery bill? Could you take a mini-vacation for the cost of your telephone bill? These are the types of observations that will help you hone in on areas that need attention.
Also, keep in mind that your largest expense may not always be the best place to focus your efforts. For example, your mortgage is probably your largest monthly expense, but if you've got a competitive interest rate, there may not be much room to maneuver at this time. However, if you are spending close to that much in discretionary expenses such as entertainment, then you have a good idea of where to start. In budgeting, proportion is key.
One of the primary keys to continued budgeting success is accounting for your expenses. If you don't keep track, you may get off course and not realize it until it's too late. This is especially true for discretionary spending.
For example, my family's "problem area" is dining out. Going out to dinner is a big treat for us because we have busy work schedules and enjoy the opportunity to take a break without thinking about the chores that we need to do at home. Since this is an area that we need to keep a close eye on, we make sure our dining expenses are tracked on a daily basis.
We set a weekly budget and everyday we jot notes about what we've spent. In order to be sure that we don't forget, we keep the "worksheet" in a very visible location, on the kitchen counter. At the end of the week, I tally it up in Quicken. Receipts can pile up, but being forced to "fess up" on a daily basis keeps us truer to our goals.
Being creative in how you account for your discretionary expenses can be very helpful in keeping them under control. Try this or a different method for keeping the spotlight on your "problem areas."
The last, but not least, important point is to forgive yourself. Everyone goes over budget from time to time. Budgeting is not an exact science and there is room for error. However, if you find you are continuing to do so on a regular basis, it is time to reassess your goals and to take a look at the accuracy of your estimates.
Finally, be certain that you have set aside some money in your budget for fun and entertainment. Budgets are crafted based on where you want to end up in the future, but they also need to provide for enjoyment of the here and now!
Take the Next Step:
- Begin recording all of your expenses for the next 90 days for a rough estimate of your spending habits. It's important to know where your money is going.
- Select a budgeting tool to help you track your expenses. The envelope system is the oldest and simplest method. Spendtracker is a simple electronic tally that you can carry with you. (Use coupon code STRETCH5 for a $5.00 discount) Mint.com offers a PC version and an online version.
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