Getting Control of Your Finances

Budgeting is a tool that works when it comes to helping you manage your finances successfully. While it can seem overwhelming to even think about getting more organized financially, let alone tracking your spending, budgeting is a tool that works for individuals, businesses and governments alike. Budgeting is a way to get your financial life under control that can yield many benefits.

Why Budgets Matter

Budgets don't have to be complicated. Even the simplest guidelines around spending can make the difference between financial solvency and getting into too much debt. People who make and stick to budgets tend to have more savings, less debt, and to feel better about their financial situations. Creating a budget is a worthwhile endeavor no matter what your financial situation is—even the very wealthy, who would seem to be the last people who would need a spending plan, create and stick to budgets.

Even a simple budget can help pave the way to financial success.
Budgeting involves creating a plan so that expenses match income.
Even wealthy people craft budgets as a way to ensure they don't spend too much.

Simple budgeting is worthwhile

Without a budget, it is all too easy not to have any idea how much money you and your family are spending and where that money is going. And without some idea of what you are spending money on, from a mortgage payment to groceries to utilities to day care, you risk running out of money before all your bills are paid.

Budgeting is no more and no less than creating some kind of plan so that what you spend equals what you make or what you and your spouse or partner make. When you budget, you take a look at any income you have that comes in, which could include any salary you or your partner make from working, and other income, which might include child support or alimony.

Then you look at your expenses and do your best to ensure that what you spend doesn't exceed your income. Ideally, your spending should be less than your income so you have money to save for emergencies, retirement and other life goals. But even if that isn't the case at first, creating a simple budget is the first step.

Creating a budget and sticking to it gives you the ability to come out ahead financially. By knowing what you spend money on and matching your expenses with your income, you'll gain financial security and the emotional security of knowing that you can meet your financial obligations.

Even rich people have budgets

People of every income group can benefit from budgeting. That's why many wealthy people track their spending and create and stick to budgets.

In this respect, wealthy people aren't any different from you or me. They want to be able to meet their financial goals and unless they know what they are spending and how their income is being deployed, they are at risk of spending more than their income and not meeting those financial goals.

A wealthy person's budget is going to be similar to the budget of someone who doesn't make very much money. They may have more bills, and those bills are likely to be larger, but expenses are expenses, and for a rich person to save any money, they must also spend less than their income. Otherwise, they will get into debt and may end up having financial problems.

Preparing to Budget

When you think about budgeting as a positive rather than a negative, it's easier to make the time to build at least a simple spending plan. That's because budgeting can set you free from worrying about your finances and from getting into debt over your head. Budgeting is a tool designed to help you feel better about your finances by understanding what you are spending and helping you better match that spending with your income.

Budgeting has many positive benefits.
A budget should have some extra money for occasional splurges.
Budgeting realistically helps a budget be more successful.

Preparing for budgeting

Before you begin to build a budget, there are some issues to consider. Firstly, it's very important to distinguish between what you want and what you need in your budget. Budgeting is focused on meeting your financial needs and some of your wants, but the needs have to come first.

Financial needs include paying for housing, utilities, food, transportation and other basics. Financial wants include things that you'd like to have, which could include anything from a sports car to a designer purse to a daily stop at your favorite coffee shop.

That being said, every budget should include some room for splurges. Without some so-called mad money, it is all too easy to rebel against an overly strict budget, and just take out a credit card and spend, regardless of the consequences. Some room in the budget for splurges is a safety valve against reckless overspending.

Be realistic when budgeting

When thinking about budgeting, it's important to be realistic. Sure, who wouldn't like to save half of their salary or include a lot of splurges in their budget? Another side of an unrealistic budget is one that underestimates expenses. It would be great if you could get by with spending less on gas, but it's unlikely that your daily commute will get shorter or gas prices will fall significantly. If you include unrealistic numbers in your budget, the budget won't work and will lead to a sense of failure.

Budgets should also be flexible so that they can be adjusted due to changing circumstances. A budget shouldn't be something that is carved in stone; think of it more like it is more a living, changing document. In fact, tinkering with a budget is encouraged.

Circumstances, situations and bills change over time. For example, you might switch cell phone providers for a better deal—in that case, your budget should be adjusted to reflect that you are spending less on your cell phone. Or, you might get a raise at work and decide to allocate that toward your emergency fund or up your contribution to your retirement plan.

Building a Budget

To build a budget, you need to start by gathering information about your income and expenses. The best way to get information about your income is to get a copy of your pay stub; if you have other income, such as child support or alimony, check your bank statement for the deposit amounts or the state online Website where payment information is stored.

To start working on a budget, gather information about your income and expenses.
Revising a budget helps keep it in line with your actual income and expenses.
Budgets need to be adjusted when expenses, income or circumstances change.

Then, start to pull in information about your expenses. Your checkbook or online banking bill pay system is a good place to start. You'll want to include all your bills, such as mortgage or rent, taxes, property, health and car insurance, utilities, car payment, daycare expenses, credit card and other loan payments, entertainment, phone and cable bills, clothes, haircuts, groceries, and any other expenses you have.

Revising a budget is part of the budgeting process and helps keep it in line with your actual income and expenses. To make changes in a budget, just add in new expenses or subtract expenses that you don't have any more, or make adjustments in what specific expenses cost. The same holds true for making adjustments in income.

Here's an example of a simple monthly budget:

You can use a similar worksheet to calculate your budget:

In the case of the sample budget, there is a surplus. You divide that surplus into two and put half in your emergency fund and half into your retirement plan. Then, if after a month or two it seems like your expenses are higher than you thought, you can allocate some of that money back into the categories that were more expensive than you thought. Just make sure that you are being disciplined about your spending before you allocate less to savings.

Making a Budget and Sticking to It

The good news is that if you create a simple budget and continue to use it to track your spending and income, you can create a sustainable path to financial responsibility. That being said, not all budgets are successful, and if you find that yours isn't working for you, you should adjust and try again. Budgets can be impacted by many factors, including unexpected and irregular expenses. You can also get tripped by your expenses outstripping your income on a regular basis.

A successful budget can create a path to financial responsibility.
A budget may fail if it isn't based on realistic assumptions.
Irregular income or expenses can make budgeting more challenging, but not impossible.

Why budgets fail

Budgets can make your life easier, but not all budgets are workable or end up working. In some cases, budgets fail because they aren't realistic. It would be nice, for example, if you could go to five different grocery stores to get the best deal and use all the coupons that you have to their best advantage, but realistically, that won't happen. So that means you should add some money into your grocery budget; otherwise you will spend more than you've planned.

Another reason budgets fail is not keeping up with them consistently and adjusting for current circumstances. If you made a budget six months ago and haven't looked at it since that time, the budget won't work since you aren't using it. By actively adjusting the budget and tracking your expenses, you'll have a better chance of success.

Dealing with irregular expenses and income

It can be hard enough to keep up with a budget when you have regular, predictable income and expenses. If you are in a situation where you have irregular expenses and income, it can make it that much tougher. However, it isn't impossible if you plan carefully.

If you are in a sales job and get commissions as part of your income or work in a profession where you get tips, you'll experience some income irregularity. Irregular expenses can also come up that can be difficult to budget for. In these cases, it is good to have some room in your budget perhaps by budgeting for lower income than you think might receive in a month, then adding the extra in if you get it. On the expense side, you could include a category for miscellaneous expenses or save more in case such expenses do occur.

What if you've done everything and you are still behind?

It can be difficult if you feel like you've made a good faith effort and your budget doesn't balance, that there are still more expenses than income. In that case, you may have to make some hard choices.

These choices could include getting a second job, moving to a house or apartment with a lower rent or mortgage, or even renting out a room in your house or moving in with family members. Or perhaps there are state or federal programs you might qualify for that could help reduce or supplement your income.

Fitting a Major Purchase into Your Budget

The first step in (responsibly) financing a major purchase is to establish a household budget. That way, you can see how and where the planned purchase can be fit into your overall financial picture. In a nutshell, budgeting is simply the process of balancing monthly cash inflows with expenses.

A major purchase is a variable expense.
The purpose of recording your cash inflows and expenses is to "find" dollars that you can "pay yourself first."

Inflows and expenses can be looked at several ways

For most of us, cash inflows are predictable—typically, a paycheck. Expenses may be fixed (e.g., house payment or rent) or variable (e.g., entertainment or "pocket money"). These examples of expenses may also be characterized as discretionary or non-discretionary: you can choose to spend on a night at the movies, but have no choice about paying your mortgage.

A major purchase, by its nature, is a variable expense—we don't need a new roof every month. But it is important to recognize whether a big purchase is discretionary or not. When the refrigerator dies, we need a new one immediately, but the 48-inch TV can wait.

Try this exercise

For a month, carefully record your cash inflows and expenses (especially the latter). This overview will help to project future cash-flow needs and suggest which expenses can be targeted for cutback, if need be.

The point of this exercise, as most financial advisors agree, is to "find" dollars that you can "pay yourself first." Paying yourself first means setting aside and saving a certain amount of money from your gross income on a regular basis.

Paying cash for everything we buy is clearly a good way to avoid becoming burdened by debt. Unfortunately, however, the dead refrigerator or a hole in the roof demands immediate attention, whether or not funds are available out of pocket. So you will also need to examine the use of borrowed funds for financing a major purchase.

Automatic savings and investment plans for major purchases

The most painless way to "pay yourself first" is to set up an automatic savings program. Consider having regularly scheduled withdrawals made from an existing account (e.g., the checking account where your paycheck is deposited) and transferred into a dedicated savings or investment account. Generally, any financial services institution that offers savings or investment accounts will offer an automatic savings plan.

Experts recommend creating an emergency fund as a first savings priority; three to six months' living expenses is a rule-of-thumb goal. Ideally, this is where you would turn for that new refrigerator tomorrow.

Summary of Budgeting Made Simple

In this tutorial, we've introduced you to some ideas about how simple budgeting can help you get control of your financial affairs and make it easier to pay your bills and save. By taking a look at your ongoing expenses and your paycheck and other income, you can match your income with your expenses and hopefully put some money aside for emergencies, retirement and other important life and financial goals.

Now that you understand the importance of budgeting to maintaining financial responsibility in your life, we'd like to encourage you to adopt budgeting into your life.