Making a Budget - Coming To Terms With The 'B' Word

If you are able to read this first paragraph and continue on with the article, you have come a long way in wanting to get your financial situation in order. Sooner or later, the "B" word has to come into play. That's right. It's time to take a look at your budget.

For all of you who are still reading, I commend you. The word budget brings all the joy of having to go on a crash diet. In fact, that is how most people approach budgets. Just as with a diet, you know you are going to be forced to do without the things you really want and be absolutely miserable throughout the entire process. While this is an option you can choose to take if you desire, we will try to present some less antagonizing options to get your budget in order.

First and foremost, let's get clear what a budget is. A budget is merely a plan to spend less money than you make. Nothing more, nothing less. If you are not currently doing this with your money, you have 3 choices:

1. Reduce your current spending so that it is below the income you bring in
2. Figure out a way to earn more money so that you can continue your current spending habits
3. Continue to fall deeper in debt

Since #3 is not an option in this article, we will focus on the first 2 choices. Many "reduce your current spending" budgets are created in such a way that you are already doomed to failure before you even begin. A good example is a budget created by arbitrarily designating the amount of money you want to save each month. For example, someone earning $3,000 a month decides to only spend $2,500 a month thus saving $500 each month. Although this may at first appear to be a sound approach to creating a budget, it will almost surely fail. Most people who budget this way will find at the end of the month they are running short of money. They therefore must stop buying all items, including those which are essential, in order to remain within their designated budget. Since most people aren't willing to forego staples such as food, this budget method usually ends in failure.

An important aspect that most people fail to address when creating a budget is finding out where their money is actually being spent each month. A better approach than arbitrarily designating an amount to be saved is to take the time and actually write down where your money is going. We know that this prospect sends shivers down your spine. Who really wants to know where the money is going? Part of this fear stems from the thinking that if you really know where the money is going, then you can no longer deceive yourself of the way you spend money. Ouch! However, it's got to be done. Whether you like it or not, in order for a budget to work, you are going to have to be willing to take some responsibility. Without taking the responsibility of knowing how you spend money, making a budget that works will be next to impossible and you can stop reading right now.

The Benefits Once You Know Step number one is gathering up all your spending information. If you actually have all your receipts from the previous month, you're well ahead in the game. If you are like most people and only have partial to no documentation of where you're money has been going, it's time to start saving those receipts and bill statements. Your collection system doesn't need to be anything fancy, and a big envelope will do. Once the information has been gathered, you're ready to make the budget.

Before you give up because the effort of keeping track of all this information will be way too much, there are a number of good programs you can buy that will allow you to see where your money is going. For those not willing to pay for a budget planner at the moment, you can still do a free GreedyFools cash flow analysis. Even for people who don't feel they need to make a budget, taking the time to gather all your spending information and seeing your current spending habits can be an eye opening experience.

The good news is that once you know where the money is going, you have put yourself back into control and can make the decisions that need to be made. With you current spending habits now in front of you, you can see if there are expenses which you really don't need to be making, areas where you need to reduce the amounts you're spending as well as items or activities that cost more than what they're worth. By taking the time to read some of the articles on this site and look at the saving tips, you should be able to reduce a number of expenses quite extensively with only minor changes in your habits.

An additional benefit of keeping track of where your money is going is that you can begin to plan for expenses for which most people fail to prepare. These include regular, but infrequent expenses such as health insurance costs and taxes, as well as irregular and unexpected expenses such as car repairs, large appliance purchases or hospital treatment. These are the expenses that make many people feel as if they have enough money most months, but then suddenly find themselves missing their budget targets during other months.

For those who find that they are not able to reduce their spending below what they are making, then the obvious answer is that you need to figure out a way to make more money. This is an aspect that is often ignored when making a budget, but a perfectly acceptable alternative to cutting expenses. Whether it is asking your boss for a pay increase or turning a current hobby into a part time business, there are a number of actions you can take to increase your current income.

Changing old habits is never easy, but taking the time to write down how you do currently spend your hard earned money will make it a lot easier. Better yet, once you have your spending in line with the amount of money you're making, getting out of debt and saving for retirement has once again become possible.

Copyright Jeffrey Strain 2003. Reprinted with permission: GreedyFools.com is a down to earth money matters site providing a wide variety of savings articles and tips, as well as the savings newsletter, The Greedy Fool. Please read the disclaimer covering this article.