How to set up a budget

Believe it or not, as we reported in a previous article, 65% of Americans do not have a personal budget. A budget is an essential tool to get a handle on where your money is being spent.

Here is a guide to get you started:

Keep track of your spending. This may seem obvious, but many of us spend small amounts of money here and there, and then wonder at the end of the month where our money has gone. Keep track of everything you buy for two complete months. For credit card bills, itemize what you have purchased.
Log your spending the good old-fashioned way with pen and paper so you can take it with you when you’re out shopping and easily record what you’re buying. It sounds tedious, and it is, but hang in there. It will help you in the long run.
Categorize your spending. At the end of the two months, divide what you have spent into categories and by daily, monthly, quarterly, seasonal and annual expenses. Don’t forget items that may have not been included in the two months holiday gifts, car insurance payments, taxes, magazine subscriptions, etc. A good list of categories to include can be found here.
Total your monthly income. Include tips, child support, alimony pay, public assistance or bonus pay. Only include net income (after deductions) and be sure to multiply your payments (for example, if you are paid twice-monthly at your job, be sure to multiply each paycheck by two) as necessary.
Set goals. Obviously, you aim to pay all your bills in a given month. Determine if you are overspending and how much you can cut back in each category. Decide what you can live without so you can begin setting aside an amount to save. Be realistic – you don’t have to give up going to the movies every week as long as you are cutting back in other areas to meet your goals. Decide what is essential and what is not. Don’t make your goals too rigid or you’ll drive yourself crazy.
Determine your budget. Once you’ve tracked where you’re spending money and what expenses you incur each year, you can decide where you will cut back and how you will spend differently to meet your goals. Take each category of your spending and set a new spending limit. Make sure your monthly expenses are fully covered. If you prefer to have a spreadsheet to organize your spending, a comprehensive review of free online budget tools can be found on the web site
Stick to your budget!
Several years ago the U.S. Securities and Exchange Commission published a report on Saving & Investing and gave the following illustration:

If you buy a cup of coffee every day for $1.00 (an awfully good price for a decent cup of coffee, nowadays), that adds up to $365.00 a year. If you saved that $365.00 for just one year, and put it into a savings account or investment that earns 5% a year, it would grow to $465.84 by the end of 5 years, and by the end of 30 years, to $1,577.50.

Many consumers struggle to pay bills on time each month, much less set up a savings plan. However, if you decide to give up that $1 coffee (or $4 latte!) as part of your budget plan, you can build savings over time, spending money where it matters. So, start budgeting today!

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