Setting a Budget That Works

Why budget?
Many people earn a paycheck, use credit cards, pay bills, and go shopping without ever knowing exactly how much money is actually coming in or going out. Any financially successful business must track earnings and expenditures to know whether or not they are making a profit. Why does an individual think that he could get ahead financially without doing the same?

A budget is a money management plan, a roadmap to your financial destination. A sensible budget will allow you to live within your means, secure a better future, and let you enjoy your days without worrying about money matters. Our sense of self worth is often affected by how much money we make, whether or not our bills are paid, and whether we can afford those extra luxuries we all love; setting a workable budget will enable us to take control of our financial situation and feel good about what we’ve accomplished.

Money issues are a huge source of stress for families who don’t have a clear idea of where their money should go; marriage and partnership can be strengthened when both partners are working together towards a common goal. Having a budget will allow you to direct your money to the things that are important to you; you’ll avoid going shopping, to buy things you really don’t need, just because you’re bored and have a little extra money in your pocket. Impulsive purchases can be eliminated if you budget for big-ticket items; you may find that you really didn’t need something once you take the time to figure out how much and how long you have to save to get it.

Setting a budget is useless if you can’t stick to it. Create a budget that supports your lifestyle; one that deprives you of too much will only make you feel like you are being punished. A budget should allow for paying your bills, saving some for the future, and for enough recreation so that you feel rewarded for your commitment to responsible spending.

You may find that you do have to cut back on some things to stay within your budget, but usually the money you’ll save on frivolous “boredom spending” will more than make up for it. In developing your budget, you may find that you have unnecessary or unused memberships, cable channels you pay for that aren’t worth watching, or indulgent habits that are worth giving up or reducing.

You may realize that you are spending more than you make every month with the help of credit cards and cash advances; that will have to be changed if you don’t want to be buried in a mountain of debt one day, possibly facing bankruptcy. Seeing all your income and expenditures in black and white will help you see what you’re really doing with your money, and also what you could be doing with it.

It’s amazing that one little daily habit of smoking, gourmet coffee, or fast food can add up to a couple of hundred dollars a month. What could you do with an extra couple of hundred dollars a month? Would you start saving for retirement, a dream vacation, your kid’s college fund, or a huge flat screen TV; or would you be saving for all of those things? That’s your decision, and a realistic budget can help you achieve those goals.

Developing your budget is not a one-time thing. A good, realistic, workable budget should be updated to reflect the changes in your life as they happen. If one of you gets a temporary part-time job, you can’t just say to yourself, “Oh, we have five hundred dollars more to spend each month for a while.” Instead, factor that additional income into your budget and allocate it to something. If you just leave it up in the air, it will disappear without you having much to show for it. If your expenses increase in one area, you may have to cut back in another area to stay on track.

If reducing your debts is your focus now, one day you will have eliminated many debts and will then have more to spend or save. You may be saving for a down payment on a house; you’ll have additional income to work with once you’ve bought your home. It’s important that your budget works for your life as it is now, one that you wrote up even a year ago may not make sense in your current situation. As you gradually achieve the goals that you have budgeted for, you will have new goals to aim for.

Your budget should also be flexible enough to allow for life’s little surprises like last-minute birthday gifts, repairs and maintenance, and medical care. You can work towards growing a substantial savings to dip into for those types of occasional expenses. Or, you could allot a set monthly amount for those surprise emergency expenses, and whatever isn’t needed can go towards flexible expenses, maybe towards additional investments or possibly even entertainment.

How you do it is up to you, but make sure it’s something that works for you. It’s also very important to factor a savings plan into your budget; you can’t just save what’s left over because there usually isn’t going to be anything. The whole idea of budgeting is to secure your present and your future; you should be building towards that future by saving today.

When you set your budget, you will find that it doesn’t cost the same to live every month. Fluctuations in the market, fuel prices, kids getting sick, running the heat or air-conditioning more often, and just going out for your favorite seasonal past-time will require a budget that is flexible enough to accomodate these happenings. You can look at past credit card and bank statements to get a rough idea of what it costs for you to live, but you can’t predict every expense.

Be flexible in your thinking, don’t lose heart if your budget doesn’t work out one month. You may just have had a bad month or you may need to write up a new plan that’s more realistic. Just figure out what you need to do to reach your goals, and make steady progress towards those goals. Your budget is your money management plan; you are the one in control. Consider all income and expenses when drawing up your budget:


Income

• Paycheck
• Child support or alimony
• Rental properties
• Interest, dividends, capital gains

Expenses

• Rent or mortgage
• Utilities
• Loan payments – auto, student, personal, other types of loans
• Credit card payments
• Groceries
• Fuel and auto maintenance
• Insurance
• Medical care
• Child care or child support
• Lawn service
• Clothing
• Hobbies and recreation
• Entertainment and dining out
• Saving and investments
• Miscellaneous expenses