For so many years in our house we used the simple budgeting system. We had an Excel spreadsheet that listed our expense categories and income then just applied formulas. But it never really worked out as well as the spreadsheet said it should have. Then late last year we tried out a free personal budgeting system (I written before about my love for Mint). Because the system connects to our bank account nothing gets by it. A real eye-opener. All that cash that slipped away a little here are a little there was now in our face. So now after a little over 6 months we feel like we've got a good working budget that doesn't leave us scratching our heads at the end of the month.
So, here's my real simple, real version of how to create and live by a budget.
Creating a Budget 1-2-3
1) Track spending AND Income for no less than 3 months.
I've often read that you should track you spending for one month to create a budget. This is crazy. There is no such thing as a typical month. Birthdays happen. Cars break. One month cannot be an example of your life. And don't forget income. Many of have predictable paychecks, but some do not. Averaging your income over 3 months gives a better view than just one.
We are all impatient to see results and tracking for 3 months requires patience and diligence. The task will be much less taxing if you use a budget software. Before you begin your tracking sample everything out there (Mint, Quicken, Microsoft Money, and others). Choosing one that is free isn't any worse than one you pay for. Just find one that you like and that works.
2) Set up big generalized categories.
I made the mistake of have far too many categories in the budge when I first started. It was too detailed and too complex. Group your expenses in big categories with many sub-categories under each. For example: The big category of Food will have subcategories of Groceries, Restaurants, Fast Food, Coffee Shops. Auto and Transportation includes: car payments, gas, service and repairs, bus fare, tolls, insurance. Also, don't forget fun like entertainment and vacations. And be sure to include debt payment and savings.
3) Balance your budget.
It may seem obvious, but be sure that income outweighs your expenses. Don't let you budget be equal. Have all spending categories, including savings and debt payment, add up to less than your income.
Using a Budget A-B-C
A) Check up on it.
While your tracking your spending check your budget frequently--even everyday. Ensure that transactions are categorized correctly. Once you've passed the initial tracking period you should still check your progress frequently. After you've established a budget and are following it you can relax just a little--check your account a few times a week.
Bonus: Frequently monitoring your account will help you uncover errors and fraud attempts too.
B) Enforce spending holds.
You've set a spending threshold now stick to it. If your Food category is approaching or has passed the budgeted amount for the month don't spend any more for the remainder of the month. If your Health & Medical category went over unexpectedly put a hold on entertainment spending, for example.
C) Set goals and see them achieved.
If you've had a good month and kept your spending down then reward your wallet by putting extra toward you goal of increasing your emergency savings or paying down debt.
I can't repeat enough that there is no such thing as an average month. Don't expect to stay within your budget every time. You'll have good and bad months with unexpected expenses and income. Keep the big picture in mind at all times. Focus on your goals and control your spending. If you don't take it personally when you slip-up then you will succeed.