Budgeting

Trying to manage your personal finances without a budget is like taking a road trip without a fuel gauge, road signs, or a map. You will soon run out of gas and be stranded since you cannot tell how much you have in the tank, how much farther you have to travel, or how to know when you reach a destination. The good news is that creating a budget is easy. All you need to know is two things.

You need to know how much money you have to spend.

You need to know what expenses you need to pay.

But most people never track their spending, according to a recent survey from the Certified Financial Planner Board of Standards. More than half claimed to have a budget, but all they really had was checking account and credit card statements, plus piles of receipts. That’s better than nothing at all, but what you really want is a system to precisely track your spending.

To simplify the process, you can use an online tool or app. There are many, but one of the most reputable and popular, for example, is Mint (https://www.mint.com/). Mint is free to use and there are no hidden fees.

You should set up your budget so that you can see the amount budgeted in each basic category of expenses.

You could use large categories, like “food,” “housing,” “insurance,” or “transportation.” But it’s better to be more specific. What kind of insurance? Is it dental insurance for your child, or flood insurance on your home? That’s important because you may be able to buy some insurance with a higher deductible to lower the monthly payment. Does housing mean your mortgage, or does it include homeowner’s insurance and property taxes, plus utilities? Does transportation include gasoline? Does it include car and air travel, or an oil change? Being more specific gives you those answers with a snapshot view of your budget.

For example:

*Tithing/Charitable Giving
*Groceries
*Auto Maintenance
*Travel
*Hotel Lodging
*Gasoline
*Restaurants
*Mortgage
*Auto Insurance
*Home Insurance
*Health Insurance
*Clothing
*Phone
*Electricity
*Water

This more detailed way of creating categories is more helpful, because it allows you to really pinpoint exactly which expenses cost what – and where you may be able to cut back on overhead. For instance, if you lump groceries and restaurants together under a category called “food” you won’t know how much is spent in restaurants. But if you do know how much, and need to trim your expenses, you’ll see that going out to eat less will let you accomplish that financial goal. A budget should also tell you how much money you can afford to spend so that you can be disciplined about your money management.

You’ll also want to factor in expenses that may not occur once a month, like insurance payments, visits to the dentist, new tires, or money set aside to pay income tax. But you can still budget for those on a monthly basis. Just figure out how much they total per year and divide that amount by 12 months. Then add that amount to your monthly budget to ensure that each month you set aside enough to account for those expenses.

Of course your budget needs to align with your income, so you aren’t budgeting for expenses you cannot afford. But once you know what your expenses are, that gives you the insight to match them against you income. If you have more expenses than your income allows, then you have to strategize ways to cut your costs and save. When your expenses exceed income by 10%, for instance, you may need to trim 2% off of five different expense categories. Or you may have a couple of expenses that represent 5% of your budget each, that you can eliminate if they are for non-necessities such as entertainment.

Even if you think you have a pretty good idea of how much you spend and what you spend it on, accurately tracking your expenses on paper can be very revealing. You’ll find places where money is leaking out that you never suspected. Those hidden leaks are an opportunity for you to save money and apply it to paying off debts or for special purchases like vacations, home improvements, a car, or tuition – as well as financial investments to build wealth or ensure a comfortable retirement.