Learn to Budget Money
By Steve Gillman
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
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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