Designing a Budget That Works

I’ll warn you, this will take some time and effort, but a budget is, by far, the easiest and quickest way to gain control of your finances and to really “see” where you are and where you can be, financially speaking.
A good budget is not constraining except in the case of overspending. It’s a structure, within which you can work to control your expenses and eliminate panic by planning ahead for things like annual property taxes or replacing tires. A budget helps, not hinders.

Budgets are, or should be, very individualized. No one has the exact same set of circumstances that you do, so to make a budget work for you, start with your own figures.

Gather up as much spending history as you can find for a full year if possible. Include grocery receipts or checks written for groceries, utility bills, credit card statements, tax records, insurance and other recurring payments, mortgage payments and any other bills you pay.

Now to the work: You’ll need paper, pencil, a calculator, a couple of hours and some patience. Start by going through your records and as you come across a category like clothing or hair cuts, make a column for it. Try to cover everything you can now, but you can add more later. A good budget is a work in progress, so when you make a decision, it isn’t written in stone. You can always adjust, elminate or add it later.

Once you think you have all of your categories listed, fill in the columns with the information you gathered. You might notice seasonal differences (utilities or clothing) as you work with these figures. If so, make a note of them elsewhere to help you make adjustments later on. For now, just concentrate on getting all of the figures in the right columns.

When you have all of your expenditures categorized and listed with the amount paid out, add up each column to find the total spent. Don’t make any judgements just yet.

The next step is the clincher: Add all of the column totals together. Now deduct this total from your income total, minus taxes. Or deduct your income from this total. If you need to do the latter, some adjustments need to be made quickly!

Now’s the time to go get a cup of coffee and let these figures dance around in your head for awhile. Are you spending more in one area than you thought you were? Are you spending more than you’re making?

While your circumstances are unique to you, there are a few general guidelines you can follow to see how your after tax spending stacks up. Housing generally takes up about a third of your income, transportation gets a fifth, with food taking yet another fifth. Clothing, toiletries, gifts and other miscellaneous spending is generally around one tenth, and insurance (other than auto) and savings make up less than a tenth. No, that doesn’t add up to 100%… these are not goals; they’re only very general ideas of the way most people spend.

Ok, now it’s time to make adjustments. If you don’t already have a column for savings, add it in now. Sort through the rest of the columns, looking for unusual or one time expenditures. Prom dresses or wedding attire, vacation wardrobes or maternity clothing all qualify. You can deduct these from the category, but you can’t ignore them. Instead, add them all together, divide by twelve and add that to a sum you’ll be putting into savings each month.

Do that with each category, adding to the special savings for one time expenses. This will be a sort of slush fund under control. You’ll need to put the money somewhere so you can get to it quickly but not too easily.

Now you should be left with ongoing, normal expenses for a year. Divide these into monthly amounts and you have the basis of your budget. Start with a fresh sheet of paper and make your columns again, but only put these amounts at the top along with the name of each category.

Now you’ve got a budget started and you can make some changes to bring it in line with your income and/or goals. There are as many ways of saving money as there are of spending it, so take one category at a time. If you need to cut your spending in any area, look up “frugal living” or “personal finance” on the internet and start putting into practice the advice found there.

Every month, try to stick to the amounts you’ve determined to be right for you. Use the columns to write your actual purchases and at the end of each month, total them. Continue working with these amounts until you have it right. Make adjustments on what you spend as well as what you have allowed. Don’t allow more than you make and don’t spend more than you’ve budgeted… but be realistic about what you need where. If you have money left over in any category, put it in savings, or hold it for next month. Don’t spend it just because it’s there.
A good budget doesn’t happen overnight and it doesn’t happen by chance. If you create a working budget for your own finances, you’ll find yourself gaining ground no matter what the circumstances.