August 2008
Budgeting
Create a spending strategy
Once you know where your money is going, you'll find ways to trim the fat.
Illustration by Bob Eckstein
Does the word "budget" strike the same fear in you as "root canal"? Then try this trick: Call it a "spending plan" instead.
That's what a household budget really is—a plan to track your spending and keep it within boundaries. Done right, a budget lets you spend without guilt. Here we offer ways to make your budget—oops, spending plan—simple and painless.
SET GOALS
Establish long- and short-term savings goals. Then determine a monthly amount to devote to each. The short-term goal, say, buying an iPod, will keep you motivated.
TRACK EXPENSES
This can be accomplished two ways:
Low- to mid-tech. Write down and categorize all expenditures for at least a month. Use a notebook, an electronic spreadsheet such as Excel, personal-finance software like Microsoft Money or Intuit's Quicken, or free, online services (see Follow your plan electronically). Keep in mind that budgeting software can take a couple of hours to set up.
High-tech. Use credit cards, debit cards, and checks for all your spending, then track and categorize everything with software. List all cash expenditures—the barber's tip, for instance—as "cash." This method works only if you pay off your credit-card balance each month and run no risk of overdrawing your checking account. (Remember that debit cards don't carry the same consumer protections as credit cards.) To update regularly, you may need to establish Web access to your accounts.
Whichever approach you take, don't make spending categories too narrow. Vet visits, dog food, and grooming can all fit under "pets." But don't lump together two big items like groceries and restaurant meals under "food." You should track how much you're spending on each.
PLAN FOR SURPRISES
Key budget busters for many families are unexpected bills, say, the car repair that costs hundreds of dollars. Review your bank and credit-card records from the past year and tally all those expenses you had. Add 10 percent for inflation. Divide that figure by 12 for the monthly total, and give it its own category, "unexpected."
Don't forget to include your holiday spending. Divide the amount you expect to spend by 10 and set that amount aside each month. Then you'll have the cash for shopping by November.
SET PRIORITIES
Identify fixed expenses, like your mortgage and car payments, and variable but essential expenditures, like groceries. Estimate how much you'll need monthly for the variable expenses. Include savings. Add all the numbers. Subtract the total from your after-tax income. What's left over is discretionary money.
FILL THE GAPS
If your fixed expenses are greater than your income, you need to trim your costs or find more income. For some ideas on saving, see Cut your spending by $500 per month.
UPDATE REGULARLY
Every few months, reevaluate your plan and make appropriate changes. At the very least, sticking to a spending plan will make you aware of where your money is going. And in all likelihood, you'll soon find yourself closer to where you want to be.
That's what a household budget really is—a plan to track your spending and keep it within boundaries. Done right, a budget lets you spend without guilt. Here we offer ways to make your budget—oops, spending plan—simple and painless.
SET GOALS
Establish long- and short-term savings goals. Then determine a monthly amount to devote to each. The short-term goal, say, buying an iPod, will keep you motivated.
TRACK EXPENSES
This can be accomplished two ways:
Low- to mid-tech. Write down and categorize all expenditures for at least a month. Use a notebook, an electronic spreadsheet such as Excel, personal-finance software like Microsoft Money or Intuit's Quicken, or free, online services (see Follow your plan electronically). Keep in mind that budgeting software can take a couple of hours to set up.
High-tech. Use credit cards, debit cards, and checks for all your spending, then track and categorize everything with software. List all cash expenditures—the barber's tip, for instance—as "cash." This method works only if you pay off your credit-card balance each month and run no risk of overdrawing your checking account. (Remember that debit cards don't carry the same consumer protections as credit cards.) To update regularly, you may need to establish Web access to your accounts.
Whichever approach you take, don't make spending categories too narrow. Vet visits, dog food, and grooming can all fit under "pets." But don't lump together two big items like groceries and restaurant meals under "food." You should track how much you're spending on each.
PLAN FOR SURPRISES
Key budget busters for many families are unexpected bills, say, the car repair that costs hundreds of dollars. Review your bank and credit-card records from the past year and tally all those expenses you had. Add 10 percent for inflation. Divide that figure by 12 for the monthly total, and give it its own category, "unexpected."
Don't forget to include your holiday spending. Divide the amount you expect to spend by 10 and set that amount aside each month. Then you'll have the cash for shopping by November.
SET PRIORITIES
Identify fixed expenses, like your mortgage and car payments, and variable but essential expenditures, like groceries. Estimate how much you'll need monthly for the variable expenses. Include savings. Add all the numbers. Subtract the total from your after-tax income. What's left over is discretionary money.
FILL THE GAPS
If your fixed expenses are greater than your income, you need to trim your costs or find more income. For some ideas on saving, see Cut your spending by $500 per month.
UPDATE REGULARLY
Every few months, reevaluate your plan and make appropriate changes. At the very least, sticking to a spending plan will make you aware of where your money is going. And in all likelihood, you'll soon find yourself closer to where you want to be.
