If you are a member of the much-criticized 1%, you probably don’t need to worry about budgeting. You can probably spend your money howsoever you wish.
Most of us are not so fortunate. We have to be careful about what we spend or, as a friend of mine once put it, we’ll end up with too much month left and too little money.
You need to know how much you’re spending
You can’t develop a budget until you’ve made a realistic list of your spending. This is an area where you have to be totally honest with yourself. If you’re spending $7 a day on lunches, you need to include this on your list. The list should include your mortgage payment or rent, utilities, groceries, entertainment, insurance payments, auto or student loans and any other of your expenditures.
Many experts believe the best way to create a budget is by using a spreadsheet such as Microsoft’s Excel or the one that comes with the free program OpenOffice.org. If you don’t have a spreadsheet program, you can simply use a ruled sheet of paper. In any event, you will need to have five columns. The first should be a list of all your expenses. The second should be labeled “Estimated Expenses,” followed by “Actual Expenses,” “Budgeted Expenses” and New Actual Expenses.”
Fill in just the first column
Begin by listing what you are spending on each item in the first column. Again, be honest. If you’re having financial problems, this should help you understand why.
Start keeping track of every expense
Next, make a habit of writing down every cent you spend. If you spent a $1.49 on an energy drink, write it down. You need to know exactly how you are spending your money and for what.
Do this for a month. Now go to your budget and fill in the second column, “Actual Expenses.” This may be a very eye-opening experience. Most people who go through this exercise find that they’re spending a lot more in most categories than they thought they were.
How low can you go?
Take a long, hard look at Column #3 with the idea that you want to cut your total expenses by some percentage such as 10%. While you can’t do much about your mortgage payment or rent, you might be able to cut your grocery spending, your entertainment, the cost of your auto insurance, maybe your utilities and all those little miscellaneous expenses that can add up to one big number.
Don’t stop tracking your expenses
You will need to continue tracking all your expenses as carefully as possible so that at the end of the month, you can fill in Column #5, your “New Actual Expenses.” If you did a good job of estimating by how much you could reduce your spending, the numbers in Columns #4 and #5 should be fairly close. If not, you will need to take a look at where you went wrong and adjust your “Budgeted Expenses” accordingly.
Keep sticking to the budget
Creating and sticking to a budget isn’t much fun in and of itself. However it can reduce the stress in your life by helping you get and keep your finances under control.