Setting Up a Budget That Works
A good budget is part of the foundation for financial success. A budget is nothing more than a plan for how youíre going to spend the money you earn. It helps you predict income gaps and helps you see the best way to use your money. You can use a budget to guide your everyday spending and to meet financial goals but you have to set it up correctly.
Start with a positive attitude about budgeting. Budgets generally have a negative reputation. People often feel like they're putting their money on a diet and that they'll no longer be able to spend as they please. Thatís not true. Making a budget is all about making good choices about your money, much like living a healthier lifestyle by eating from the basic food groups.
Consider all your reliable sources of income. The key word here is ďreliable.Ē If you have a variable or undependable source of income, donít base your budget on that figure. For example, if your ex-spouse is inconsistent or late with child support payments, donít factor that money into your budget. Yes, itís money thatís owed to you, but by depending on something thatís undependable you're setting yourself up for failure.
Donít leave out any expenses. When it comes to budgeting, no expense is too small or insignificant. Factor in even the smallest monthly expenses, like your gym membership or weekly Redbox movie rentals. Leaving out several of these smaller expenses would create a large gap in your spending that could make it seem like budgeting doesn't work. Use your check register (if you keep one), your bank statement, or receipts to catch any expenses that you may have left out.
Be sure to factor in quarterly, semi-annual, and annual expenses. Some things you may pay only a few times a year or even just once a year. If you don't plan for those expenses in advance, youíll have a problem when they're due.
Account for non-monthly expenses in your budget by breaking them down into monthly amounts. Divide quarterly expenses by 3, semi-annual expenses by 6, and annual expenses by 12. Thatís how much you budget for those expenses each month. For example, if you owe $1,200 in property tax this year, you should budget $100 each month for that expense. Put the money for these expenses in a separate account, like a savings account attached to your checking account, and transfer the money back when it's time to pay that expense.
Use real numbers not estimates, especially for your income. You canít create an accurate budget without accurate numbers. Look at a recent paystub to figure out your true income. If you have a variable income, you might use the lowest amount or an average amount to create your budget.
Try to get as precise with your expenses as possible, too. Of course, some expenses vary so consider using an average or best estimate for those. Leave some room in your budget in case these estimated expenses are more than what you expected.
Budget using whatever tool is comfortable for you. Some people prefer to use spreadsheets or personal finance software. But, if these things just make budgeting more complicated, then notebook paper and pencil are perfectly fine. Some websites even have printable worksheets you can use to create your budget.
Track what you really spent. For at least the first two or three months, track your spending against your budget to see how well you budgeted. This will help you see whether you over- or under-budgeted in some areas or if you left out some spending completely. Tweak your budget based on your true spending.
Budget with a goal in mind. You might be budgeting to pay off your debt, to stop overdrafting your checking account, to save up for a vacation, or just to have a better control of your finances. Having a goal can keep you motivated to create a successful budget even when budgeting itself doesnít seem so fun.