This is the first of a series on basic personal finance.
Let’s begin with a basic definition of budgeting. Budgeting is identifying expenses for a specific period of time, allocating a specific amount of money to those expenses, and reconciling the amount you actually spent on those expenses at the end of your specified time period.
I don’t think it’s absolutely necessary to have a budget. I think tracking expenses and managing cash flow can be enough in some cases. Think about why you want to budget and what you expect to get in return.
Do I need a budget?
You need to create a budget if you
- are in debt
- think you spend too much
If you are in debt or think you spend too much money, you need to identify where you are spending your money by tracking your expenses for a given period of time. Look at your expenses over several months if you have the information available. The easiest way to track expenses is to track them online. Just about all major banks and credit cards allow you to monitor activity online and export transaction. Whatever method you use to track expenses should allow you to identify opportunities to reallocate money to reducing your debt or stop spending too much money. If you don’t find opportunities for savings you will need to find a way to increase your income. Common ways to increase income include finding a higher paying job or adding additional income streams. Hey, I didn’t say it would be easy
You might consider creating a budget if you
- constantly hit with NSFs
- constantly hit with late fees
Now for both of these you need to determine why you have NSFs and/or late fees because your problem could be lack of budgeting or a cash flow problem. You will still need to track your expenses, but you might be able to simply adjust the timing of your expenses to prevent overdrafts/late fees without actually creating a budget.
Mortgage companies generally give you until the 15th of each month to pay without penalty. Credit card companies will allow you to change your payment due date at least once year. However for other types of loans (auto, student, etc) and general utilities, you will likely have to just call and ask for the policy regarding changing your due date.
The most important category on the template is Savings. You need to treat savings, specifically the Emergency Fund, as your #1 fixed expense. Let’s face it – shit happens every single day. You cannot prevent, so at least try to be prepared. Set aside some amount of money every pay check to begin building your emergency fund. I’ll talk about emergency funds in detail in the next chapter of this series.
After Savings, you need to prioritize the rest of the categories and subcategories. That way you will know what categories to begin reducing expenses and reallocating money.
FYI, if you don’t have or like Excel try Open Office or Neo Office for Macs both of which are free. You can also try free online money management software like Yodlee or Mint, which act as a portal for all your financial accounts. Yodlee allows you to create account groups and your own budget, while Mint will give you suggestions for possible savings and creates a suggested budget for you.
The act of budgeting isn’t all that difficult. It’s sticking to the budget that gives people a lot of stress. Don’t expect to get it right in the first few months. You will make mistakes; just learn from those mistakes quickly.
Also don’t go overboard denying yourself any fun. If you go overboard you will get discouraged and likely quit budgeting. Moderation is key. Reduce expenses before eliminating expenses all together. For instance if you’ve been going to the movies every weekend, cut back to going twice a month. If you still need more money, go to second-run theaters for more savings. If you still need even more money, consider Netflix or the Blockbuster equivalent. And the last resort is your local library. I think eliminating an expense should be a last resort unless you paying for things you aren’t actually using.
- Let’s recap
- Determine if you need a budget and why.
- Identify and prioritize your expenses.
- Find a budget template or create your own.
- Get started!