Personal Finance: Budgeting

Without a budget, many of us just muddle through, trying to stay one step ahead of our bills, living paycheque to paycheque. If the word "budget" makes you squirm, think of it like this:

• summarizing how you spend your income
• creating guidelines for your spending

Thinking of a budget as a financial restriction is a sure way to set you up for failure. A budget is simply:

• a tool to increase your consciousness of how and where you spend your money
• a guideline to help you spend your money on the things that are most important to you

How do I start budgeting?
The first step is setting up income and expense categories to track. Basic categories such as housing, utilities, insurance, and food are a good place to start but we also each have expenses that are unique to our personal situation. The plan is to become more aware of where your money goes so you can be more aware about your spending decisions. You can use a budget program, a simple spreadsheet, or a piece of paper.

The next step is to start putting amounts into the fields of the spreadsheet or budgeting program you have decided to use. To get started, gather as many of your pay stubs, bills, and receipts as possible. Work out your average monthly gross income, including average salary, commission, bonuses, dividends, and interest.

Next, go through your bills and receipts for the last three months and list all your monthly expenses on a budget worksheet. Make your categories detailed enough to provide you with useful information about your spending habits, but not so detailed that you become bogged down in trivial details.

Now that you've listed estimates for your budgeted amounts, don't forget to record your cash expenditures. Write them down in a little notebook as you spend the cash or figure out something that works for you. You may be surprised at where your cash goes, especially if you make frequent ATM withdrawals. Some people use credit cards or debit cards to track all of their monthly expenses and carry very little cash.

The Truth Comes Out!

Now that you have successfully tracked your income and expenses, subtotal the income and expense categories and subtract the total expenses from the total income to arrive at your net income and now you know the amount of money you have left over for savings, emergency funds, etc. If the number is negative, your expenses are greater than your income. Don't be depressed because it’s likely your situation can be greatly improved by changing your spending behavior.

If you're fortunate enough to have a positive net income, be sure to transfer most of it to a savings or investment account at the end of each month because extra money left in your regular account has a way of getting spent.

Sticking with the Program

After you've tracked your actual spending for a month or two, you'll be better able to identify where you can make changes to start saving money. Consider it a process of self-discovery. Many people don't have a clear idea of where their money goes until they start tracking their spending, and then they are usually very surprised at how much they spend in certain categories over time. You can't control your money until you know how much you have and where it goes.

Once you've got the budgeting process in place, take an in-depth look at your largest spending categories, research new ways to reduce spending in specific categories, and set sensible goals. Don't overlook the smaller spending categories, either. Sometimes these are the easiest to make cuts in because the spending may be more discretionary, and small amounts can add up very quickly.

If you stick with tracking your income and expenses past the first month or two, you'll begin to see a pattern in your spending, and you'll be able to identify areas where you can painlessly save money that you can use to save. It may sound unlikely, but discovering ways to save becomes a challenge that can be very rewarding, especially as you see your savings grow. Following a budget can set you free from the burden of living paycheque to paycheque and the constant worry that you won't be able to get ahead financially.