Develop a Useful Budget (Article #2 in a Series of 5)
Everyone wants to have complete control of their finances and be able to live comfortably and happily. There are five critical steps to follow to help you gain more control of your finances, which are:
- Track Every Penny You Spend
- Develop a Useful Budget
- Start an Emergency Fund
- Get Out of Debt
- Focus on Your Future
In this article, we will focus on the second step in the process, which is: “Develop a Useful Budget.” Budgets are a necessary evil. They are the only practical way to get a handle on your spending and make sure you are using your money the way you want to. Creating a useful budget requires three key steps:
#1: Identify how you are spending your money.
The easiest way to track your spending is by using a software program, such as Quicken or Microsoft Money, because they have built-in programs to help you review everything you have earned and spent simply by clicking a few buttons. The more often you download transactions and categorize them, the more updated information you will have and the easier your review will be at a later date. However, if you prefer, you can keep track of your receipts and write down everything you have spent over a period of time for evaluation.
#2: Evaluate your current spending and set goals.
Now that you have tracked your spending, it is time to sit down and determine your financial goals. Do you want to own a home in two years? Do you want to buy a car at the end of the year? What types of things does your family need for home improvement purposes? How old are your children and how much can you save each month for their college education? What does your retirement investment strategy currently look like?
All of these things must be considered as you establish your household budget. Budgeting is usually not a very fun process because you have to figure out what you should cut. In fact, sometimes it can lead to some frustration within the home. However, if the goals are established, cuts will have to be made. And, your goals will only be accomplished if everyone is “on board” with the created budget.
You must also consider things such as medical expenses, recreational or sports team fees, insurance costs, etc., as you develop your budget. It is wise to make sure you have developed an emergency fund should you have car problems or a major medical issue.
Go through everything you spend money on and analyze why you spend that money and if it is possible to spend less in that category. For example, John and Alice were reviewing their household spending and found that they spent nearly $400 each month dining out, whether going out to lunch or dinner. In conversation, they committed to only going out to dinner once a week and out to lunch twice a week. They felt this was a realistic option and would save around $200.
Once you go through every expense item, you need to write down exactly what you think you will spend in the coming month, or establish a budget for your family. If you use Quicken or Microsoft Money, you can actually create your budget right in the system. Then, each month when you review your budget, you simply print the budget-to-actual household budget, which is done automatically. Focus on the things that you are trying to control more than every single penny you are spending. For example, in John and Alice’s case, they would pay special attention to the food budget because they are trying to control that area of their spending.
The idea is not to deprive because no one will follow that budget. A budget should be something that is in the forefront of everyone’s minds when they are making purchasing decisions, yet doesn’t create hostility within the home.
#3: Track your spending to make sure you fall in line with your goals.
It is a good idea to monitor your budget on a monthly basis. Have a meeting with your spouse, significant other, and/or other members of the family to review where you stand. Do you need to make more cuts? Are you on track with the goals you have established? Why were certain things purchased that may not have been budgeted?
Whatever the case may be, this is the time to discuss financial goals and keep the budget “top-of-mind.” We all know that anything not measured will not be obtained; household budgets are no different. You may find that the budget may be a little too stringent in one area and maybe not stringent enough in another. This is also when you discuss modifying any portion of the budget and recommitting to make it work.
Creating a budget is a not usually a fun task. You have to review how you are spending your money; much less how other members of your family are spending as well. You have to “get real” with your finances, which can be a painful process for many. Just be sure to keep your eyes on the goals you have established and work toward a better tomorrow.