July 9, 2009
I know it's not many people's idea of fun, but it's important, and certainly not worth poking your eyes out over (AP Photo/Rich Pedroncelli)
Oh, the dreaded b-word. It's enough to make you want to poke your eyes out. If we can't look to our local, city, and state governments to balance theirs, why should we worry about balancing ours?
Well, mostly because yours is the budget you have the most control over, and a life on a balanced budget is a life with less stress, more control, and more generosity. When we let our money control us (life without a budget), we often cling very tightly to money out of uncertainty which over time can make us more selfish people, whereas when we tell our money what to do (life with a budget), we know that we have a plan . We can live with less fear of the unknown and a greater chance to be in a place to save for the future or help those in need.
A budget is a plan of how you're going to spend your money. Many times it's written out on paper, but some people use computer programs like Excel or even special software like Quicken or Money to develop theirs. Don't worry about getting special software at this point, let's keep it simple.
Balancing your budget starts with a simple goal: have no more going out than is coming in. In other words, make sure your expenses match your income. If, during a month, you can meet all your expenses (without using a credit card or going into debt), you've got a balanced budget.
A budget, however, is only as good as the numbers that make it up. It does no good to plan on spending $50/month on gas if you live 25 miles from work and drive one of those cars that gets 8 gallons to the mile (yes, you read that right). We have to start with finding out what we're actually spending. This will let us see how we're doing now so we can get start making steps to get our budget into balance. This means doing some work.
If you're still with me, good - that means you're serious enough about this to actually make a change, so congratulations! The best way to see where your money is going is to track it - again, you can use pen and paper, computer programs, whatever, just do it in a way where you track every dollar going out. Many people I work with will put a sheet of paper with columns for their various categories of spending (groceries, medical, eating out, gas, etc.) somewhere they spend time every day - a computer desk, bedside table, kitchen, etc. They take 2 minutes a day (yes, just two is all it takes) to write down where they spent money that day. And if they can't remember well or don't keep receipts, they carry a small notebook and pencil with them during the day and transfer that information to their sheet at the end of the day.
Some people also simply refer to their online bank statements containing their debit and credit card spending. This is a fine way to do it also, but in this case I would suggest sitting down once a week and transferring your information onto your record sheet. Waiting longer will mean you can forget what you went to Target or Wal-Mart for ("was that for groceries, or was it that pet turtle for cousin Andy's birthday?"). Although, in theory, you'd certainly remember buying a turtle. You get the point. Also, if you use cash, your bank statement won't help you remember where you spent the cash. You can combine approaches here and use your bank statement for your debit card transactions and a small notebook to help you with your cash spending - just make sure it all ends up on your spending sheet!
Record all your spending into those categories for a month, and presto - you've got a solid start on a budget. Two months of information is better, and three months is the best because it captures things that don't happen every month, like oil changes and buying clothes (women, you may feel differently about that one - my apologies)
You won't need to record monthly items that are the same amount (like rent or mortgage), but if you would feel better about doing so, add it to your sheet. Here are some categories you'll want to include on your sheet - you can make as many as you want, but don't overwhelm yourself - the point is to keep it simple and keep good records:
Utilities, transportation (gas, car servicing, etc.), insurance, groceries, dining out (keep these last two separate), pets, personal care (medical, health club, dry cleaning), entertainment, loans/credit cards, savings, gifts to people, gifts to charity, clothing, and miscellaneous (leave room to write when you record a miscellaneous item so you remember what it was)
I know it's some work, but it is the whole foundation of your budget, which is the foundation of your financial plan - it's the most important thing you can do right now to get your finances under control. So don't be afraid of what you might find out, and don't wait for the start of the month - get going! If you would like a sample budget sheet, feel free to e-mail me and I'll send one along. I'll also provide a link below where you can find out more about a budget. Or, tune in next time for how to turn your spending record into a budget!
You can do it!
For more info: moneyfor20s.about.com/od/budgeting/ht/budget_setup.htm