Budget Your Way to Financial Security
For many people, the “B- word” conjures up unpleasant images of self-denial and endless record keeping.
However, budgeting does not
have to be an exercise in torment and it definitely has its rewards.
A budget is basically a saving
and spending plan that can help you reach your financial goals. And with a
computer and a personal finance software package, you can make the task easier
and enhance your ability to analyze the results.
Whether you go the automated
route or stick with the pencil and paper approach, the act of creating a budget
is basically the same. You start by listing all sources of monthly income,
including wages and salary, bonuses and commissions, interest, dividends and
rental income.
Next, you identify your major
expense categories. Consider fixed monthly expenses such as mortgage or rent,
insurance premiums, childcare, and utilities, as well as your more flexible and
intermittent expenses like food, clothing, dental bills, gifts, and car repairs.
(If you’re using a computer, you can scroll through the list of default
categories.) Then, grab your pay stubs, checkbook register, and credit card
statements and begin to allocate your expenses to the different categories you
created.
You are likely to find that
some spending is hard to reconstruct. Many budget builders find that their
records reflect only a portion of their spending and, for some people, it’s a
relatively small portion. What happens is that all those cash outlays for
gourmet coffees, video rentals, and magazines seem to fall between the cracks.
If you can’t account for a
large chunk of your income, try for a few months to carry around a small
notebook and record every dime you spend. While spending $5 a day on incidentals
may seem trivial, the $1,825 you could have at the end of a year if you did not
spend it certainly is not.
Look for expenses that can be
cut back so you’ll have more money for investing, vacations, your children’s
college fund, and other purposes. A key strategy for meeting your financial
goals is to get in the habit of paying yourself first. Rather than paying all
the bills and allocating what is left over, if anything, to savings, you should
determine the amount you wish to save each month and set it aside before you pay
other bills.
It is important that you
monitor your budget on a regular basis. Once a month, or more frequently if you
prefer, record and categorize the current month’s income and expenses. Then
take a look at how you have done. Here is where the power of a computer can come
into play. Personal finance programs can depict your budget graphically. Budget
charts and graphs vary from program to program, but all allow you to compare the
budgeted amounts in each category to your family's actual expenses and income.
And you also can choose how you want to view the data.
When you compare your income
and expenses, if you find that your spending is outpacing your income, you may
need to rework the numbers. Try to squeeze a little out of several categories
rather than taking a bigger chunk out of one. And don’t ignore cuts to your
seemingly fixed expenses. For example, it is possible for you to reduce your
mortgage payment by refinancing, and your homeowners' or automobile insurance
premiums by raising the deductible.
Personal finance software not
only makes it easy to see whether you’re staying within your overall budget
but, more importantly, charts the success of your budget by category. Just click
on a month where you’ve blown the budget and the program quickly highlights
the categories that contributed to your downfall.
Personal finance software also
can serve as a planning tool. Suppose you want to celebrate your tenth
anniversary on a cruise in the Mediterranean. Assign an estimated cost and a
date, and most programs will show you how much you have to save each month to
meet your goal.
It could take several months or more before you
arrive at a budget you can live with. The key is to be flexible. If you find you
are spending more than planned, you may have to strengthen your resolve. On the
other hand, maybe your goal was unrealistic and needs to be adjusted.