Budgeting Basics for the Financially Challenged

by Traci K. on July 19, 2010

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Making and following a budget doesn’t have to be a daunting and miserable task. Budgets are meant to help you manage your money and reach your financial goals. While it can be very easy to come up with how much you should be spending in each budgeting category, figuring out budgeting basics can seem absolutely impossible: especially if you’re financially challenged like I am! There are five simple budgeting basics that make planning and following a budget more helpful – and less like calculus homework.

1) The first part to any budget is knowing why you are budgeting. Are you trying to save up for a down payment on a house? Save for your child’s education? Or perhaps simply live within your income? Whatever the reason, knowing what you want to accomplish helps you set up your budget accordingly and gives you motivation to continue watching what you spend. If you’re just starting out, I would suggest picking a short term goal (6 months to 1 year) so that you can see progress fairly quickly. It can help you stay motivated, which is essential!

2) In order to plan your budget, you need to know how much you are currently spending in different categories (bills and other fixed expenses; groceries; entertainment; clothes; medical and pharmacy; pet food and veterinary, etc.). You also need to know how much money you make in a month. There are a few different ways to track this. The time honored tradition involves going through your bank account and manually calculating expenses per category for about one month. If you’re anything like me, this sounds about as fun as having your teeth drilled. Try using an online budgeting program that will sync to your bank account and do most of it for you, like Mint.com.

3) Once you know how much you are currently spending, you can find areas to cut expenses. You need to look at your spending habits for at least one month, although preferably about 3 months. When I did my budget 3 months after getting married, I realized we were spending $250+ a month on fast food, eating out, evil work vending machines, and other unnecessary entertainment items. That was our major area to cut costs, with the second major area being groceries.  Realizing how much we were spending allowed us to reduce it to about $50 per month, and we were able to pay off our used car purchase in full 6+ months earlier than we were set to pay it off in full.

4) Setting up your Budget is the easiest part. Write down fixed expenses: Utilities, Rent/Mortgage, Car payments, Car insurance, Pharmacy, etc. Then write down how much you think you should be spending on other categories like: pharmacy/medical, pet food and vet, groceries and household goods, clothes and misc. shopping, gas, and any other categories you need. Then look at how much you spent for the last month and make sure it’s a reachable goal. You can always tweak your budget monthly. Going from $200 a month on fast food to $50 doesn’t happen all at once, so plan for success by using smaller goals over a longer period of time. Check to make sure your budget is *less* than your monthly income!

5) If you have trouble keeping track of your money once you set up your budget, there are a few options to help you on your way. If you normally use a credit/debit card, consider switching to mostly cash for a few months to keep better track. The time honored envelope method will force you to stay on track, and there’s something about parting with all that green that still makes you want to cling to it like cat hair on white clothing. (On the downside, this method would mean you need to save your receipts and track expenses by hand.) Alternatively, online budgeting software can keep track of it all for you, even sending you alerts when you’re getting close to your budgeted amount or when you’ve exceeded it.

Budgeting isn’t an overnight miracle, but if you are persistent you will see a difference after just a month. Resist your impulse purchasing urges by remembering why you are budgeting in the first place and don’t forget to reward yourself for being good! I find that time to myself, a day without chores,  or a massage from my husband are all very effective rewards that don’t cost a penny.

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