Budgeting Basics: How to Start Now
My Spending Money
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Do you have a budget? If you do, why do you budget? If you don’t, then why not?
When talking about living on a budget, people sometimes mistakenly equate it with living cheaply. Living on a budget instead means your spending is organized and planned. For those who live paycheck to paycheck, a budget is the tool that will prioritize spending and, thus, help them get a handle on finances. It will help them cut costs, prepare for the unexpected, gain control of spending, start to save and, eventually, build a safety net for the future. Budgeting itself seems to be a tedious job, but the long-term benefits are far more rewarding over than the short-term inconveniences creating a budget might cause.
What You Need to Know Before Creating Your First Budget
Before creating your very first budget, there are a few things you need to do.
- First, understand where you are today so you can plan for where you want to be tomorrow.
- Second, examine your current spending habits so you know where your money went.
Since a budget is actually a schedule of your income and your expected expenses, you should have a clear picture of how much you take home and how the money was spent each month.
How to Create a Budget
A budget consists of three parts: monthly income, monthly expenses, and whatever is left at the end of the month. In case you are not up to the task of creating your family budget from scratch, you can easily find many ready-to-use tools to get you started quickly, some of which are free. But before you invest in financial software, make sure you check out free tools first to see if any of them can meet your needs.
You can create a budget manually, or use free tools to automate categorization of your spending if you’re already using online banking:
- Manual budgeting:
While it’s much easier to figure the exact monthly income from all sources, knowing where your money went isn’t going to be easy, especially if you have never tracked your spending before. A good place to start the process is your file cabinet where you keep your monthly credit card bills, bank statements and all the other bills. By examining a few months of history, you can gain a sense of how much you typically spend on each category so that an achievable, realistic budget can be built accordingly. If you are savvy enough, you can create the simplest budget with a spreadsheet. To make things easier, Google and Zoho offer free spreadsheet templates. You’ll have to take a few preliminary steps to manually create a budget in a spreadsheet. Collect the files from your financial bills, statements, and begin categorizing all of your expenses (such as utilities, groceries, insurance, clothes, dining out and entertainment) to figure out where and how you spent your money. Next, group spending into broader categories like obligations, necessities, and allowances.
- Automated budgeting:
Free finance services like Quicken Online (here’s a brief review of Quicken Online if you are not familiar) are excellent tools for creating, analyzing, and managing your budget easily. Selecting a tool is the first part, but making sure you use it to reach your money goals is the most important step. You can buy the most powerful budgeting software out there, but it will just be a waste of money if you can’t make it work for you. If you’re at the beginning of your financial journey, free services are a great place to get started with the basics.
Evaluate Your Budget and Stick to It
Setting up your budgeting and entering the numbers you want to see in it aren’t the end of the road. In fact, it’s just the beginning of a long journey to financial freedom. What you have just finished is an easy job. Following your budget month after month, year after year is the hard part.
Many people blame the negative attitude they take towards their budget for their failure because tracking down every penny sent isn’t an exciting job. Not seeing quick results is discouraging. It could even make you wonder whether a budget can really help you meet the goals you set for yourself. Unfortunately, there’s no other way around it. If you want to see the results (the vacation you want to take or the new car you want to buy), then the best course of action you can take is sticking to your plan and constantly evaluating your progress. Compare a full month’s spending against your projections and identify areas where you can improve and revise your budget. That’s the process of balancing your budget and it’s also not an easy task because it may require cutting back on things that are not necessary. Through budget balancing, you make sure that your spending doesn’t go over your income while your savings goals are still adequately funded.
A good budget is both a process and a product. Budgeting doesn’t have to be stressful. To the contrary, it will be financially rewarding in the long-term. Be creative and innovative in allocating where your money should go. Once you reach a goal through careful budgeting, treat yourself to a small celebration. If the goal is a special dinner for two you’ve long-planned for, go ahead and take it because you have earned it.
This post is by Sun, personal finance commentator behind the Sun’s Financial Diary [RSS].
Tags: budgeting, saving money | Categories: Personal Finance, Saving |
