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Learn to Budget Money


There are some people who don't need to learn budgeting, because they simply and naturally spend less than they make, and save the rest. Why bother to allocate "x" dollars each month for this or that category if your "outgo" is always less than your income, and you invest the rest for retirement. So if you don;t want to budget, you can try habitual frugality or an income that is constantly growing larger. But if you're not up to either of these challenges, you may need to learn basic budgeting skills.

Most people want to learn to budget money only once they're in financial trouble (hopefully that's not why you're reading this, but better late than never). Debts have piled up, and income doesn't quite cover the bills and habits. Stress is a common result, and learning the usual budgeting techniques is a good idea. Those are covered in four steps below. The second part of this article presents another way to approach this problem of managing your money.

Learn to Budget

Step One - Expenditure Tracking

Write down everything you spend for two months. Have categories that make sense (entertainment, utilities, etc), so you can see where the money is going. You'll be surprised at how much money is spent in some areas, and you might also find that as you watch the money going out on paper, you begin to change your habits. Looking at your convenience store purchases on paper motivates you to skip a soda or two, just so you don't have to write it down. This a good exercise to repeat every year or so, if only for the habit-changing effect it has.

Step Two - Reduce Expenditures

Do this before you start making the actual budget calculations. Get spending under control and then you will have a better idea of how much to allocate to each category. With a bit of thought you can cut the cost of most things and activities in your life. Turn down the hot water heater temperature, combine trips to save gas, bring a lunch to work instead of eating at a restaurant. Find the relatively painless ways first - like spending an hour to find a cheaper insurance policy for your car. If these are enough, you may not need more drastic measures.

Step Three - Make a Budget

Using your current income and your expenditure tracking notes, create a monthly budget, allocating money to each category expenses. You may need $250 per month for groceries, $300 per month for paying down credit cards, and $120 for the retirement account, for example. Be sure to include all regular expenses. The totals should add up to a bit less than your income. If not, lower those allocations and take more cost-cutting measures.

You need to account for large and unpredictable items as well. You don't know when a car repair will be necessary, for example, but you do know it is an eventuality. Try this: add up the amount you spent on your car over the last two years and divide by twenty-four to get a monthly figure for expenses.

Step Four - Set Up Systems

You'll need systems for following your budget and tracking money spent. For things that are hard to track, like convenience store purchases, you can put the allocated money in an envelope at the beginning of the month. When it is gone, you are done until the next month starts and the envelop is refilled. For large expenses, like car payments, repairs, insurance and registration, it may be best to set the money aside in a separate bank account, where it can accumulate until you need it. Medical expenses can be handled this way to, and you should have an account or envelope for the "completely unexpected."

Budgeting Based on Values

Certainly it can help to learn to budget money, but there is another approach that begins with asking why you are making money in the first place. You need it to survive of course, and the steps above will help with that, but you don't manage your money just to pay bills. After all, money is a powerful tool that can serve you in your pursuit of anything that is important and valuable to you.

A value-based approach starts with identifying what is of real importance to you, and setting reasonable goals based on that. If, for example, you value travel, you might make it a goal to take a major trip around the world every two years or so. If self-development and peace of mind is important you might plan to buy good books and courses that will help. If you truly value something, set a goal, put a price on it, and then determine how much you'll need to set aside each month to accomplish it.

Begin setting that money now - even before you do the two-month tracking exercise or make a budget. Then work the rest of the budget around these important goals. You see, if you start by figuring how much you need for the "necessities" of life, it's likely there will be no money left over for what you really value. Start with what's important.

Suppose the rest of the budget doesn't work after you set aside this "goal" money.What do you do then? Cut expenses or make more money. Consider for a moment how much less money some people live on than you do. Now, if these goals are truly important to you, live like they do. Just learn to budget money for what matters most, and if it truly is valuable, you can almost certainly find a way to make the rest of the budget work too.

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