Do you ever feel out of control when it comes to money? There are times when nearly everyone feels this way, usually during a period of reduced income or unusually heavy expenses. But if you find yourself feeling this way most of the time then your financesâ”and even the little voice insideââ”may be crying out for a budget.
To some, being on a budget is like being on an allowance. It’s very limiting and makes you feel as if it’s something to be rebelled against. While that’s a legitimate analogy, limits are exactly what are needed in order to get control of your finances. The sooner you do and begin getting used to it the easier it becomes to live with.
The ultimate payoff of a budgetâ”almost ironicallyâ”is more freedom. That’s because a budget puts you in control of your money, and that always gives more freedom and flexibility than it takes.
How do you start a budget if you’ve never had one in the past?
Track your spending
Before establishing a budget, you first need to determine where it is you’ve been spending money so far. It would be best to do this by tracking your spending over the past several months. I’d say that a three month look-back is the minimum, but six would be even better. A full year would be optimal since it may reveal seasonal spending patterns that could be important.
You have to be sure that you track your spending from all sourcesâ”checking accounts, credit cards and even cash if you keep your receipts. An Excel spreadsheet will be a great help in this effort, as you’ll need a way of recording and sorting a large number of transactions. Sort all spending by general categoryâ”food, housing, utilities, insurance, entertainment, credit card payments, car payments, etc. You’ll need this to identify spending patterns.
You may even want to analyze certain categories in greater detail to find areas of excess. For example, how much of your spending on food also included restaurant meals? Or how much of your utility expense might be hiding movie rentals or online games?
Figure out what expenses to cut
Once you’ve determined where you’re spending your money, you’ll be in a position to know where to start cutting back. Hint: the largest expense categories will present the greatest sources of savings. This will help you to clear the deck so you can begin establishing priorities.
Variable expenses, like food and entertainment, are the easiest to cut back on. But if you’ve never tracked your spending patterns in the past, you may be surprised at what you find. You may discover, for example, that your money problems are due to high structural costs, like housing and debt, rather than careless excesses. This will require a very different approach to expense cutting.
For example, if housing is consuming a disproportionate amount of your monthly incomeâ”say more than 30%–you may need to consider moving to a less expensive home. If two car payments are choking your cash flow, you may need to focus on eliminating one of them as a priority. Excessive credit card payments may require a concentrated effort to begin paying them off, or even to work out a debt settlement.
Establish your priorities
After you’ve tracked your spending patterns and identified where to cut expenses, it’s time to determine your priorities.
If you’re carrying too much debt, then that has to be the priority. Debt is about paying off yesterday’s bills, and that needs to change as quickly as possible. Also, as you pay down and eventually begin paying off debt, you’ll free up cash flow for other priorities.
If it’s never been a priority in the past, saving money needs occupy a prominent position in your budget. A well stocked bank account provides budgetary flexibility as well as a cushion in emergencies, and having one is the beginning of financial security.
Charitable giving should be given a place as well. If you’ve been blessed with any measure of prosperity in your life at all, you need to give some backâ”to church, to the less fortunate, to those facing crisis. Balance this with your debt position first however, otherwise you may be unknowingly giving with borrowed money.
Commit to it!
Once you’ve prioritized your spending, cut excessive expenses and have begun paying debt, saving money and giving, you have the makings of a budget. Congratulationsâ”you’re almost there!
Now you need to apply it consistently! And this is where most budgets either succeedâ”or crash and burn. In order for the budget to work you need to commit to following through on it. You may never have had a spending plan in the past, but now you do, and it needs to be guide in all things money. And not just for you, but for everyone in your family.
Being on a budget is like being on a dietâ”there’s self-denial, discomfort and a long period of adjustment. In fact, if none of these are present, you probably don’t have a very solid budget in place.
Fortunately, as time goes on and you settle into your new way of handling money, it will get easier, and that’s when the biggest payoff comes. You’ll be comfortable and you’ll be in control!
(Kevin Mercadante is professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry. He lives in Atlanta with his wife and two teenage kids and can be followed on Twitter at @OutOfYourRut.)
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