How to Budget: A Beginners Guide

Living on a budget doesn’t mean you are in the poor-house; it simply means you are smart about your spending.

In today’s financial climate, budget planning is extremely important. If you’ve managed to hold onto your job and escape the unemployment wave sweeping across America, pat yourself on the back. And if you are one of the 15 million unemployed Americans in today’s weak economy, financial budgeting is even more important. While you look for work, or wait for a miracle job to land in your lap, you should be aware of what you are spending. Unless you are filthy rich, engaging in a budgeting process is a smart thing to do.

Making Your First Budget

Step 1: Tallying Your Expenses

Listing your expenses is usually the most tedious and unpleasant part of the budgeting process. Budget planning software provides much-needed help with tracking one’s expenses. It is also better to think in terms of annual sums versus monthly, factoring in differences caused by seasonal changes (i.e. air conditioning, heating, gift-giving season).

To get started, list your expenses according to two categories: fixed and variable.

Fixed expenses must be paid each month and are more-or-less stable. Housing payments/rent, car payments, and bills such as real estate tax, gas, electricity, water, cable, phones and cell phones. If you pay membership at a gym, or to a movie store, include these under “fixed” as well. Debt and loan payments count too.

Variable expenses are not pre-set, and vary monthly. These include everyday expenses, such as food (groceries and restaurant spending), drug store/pharmacy, transportation/gas, alcohol, entertainment, gifts and shopping. Also factor in vacation expenses, doctor’s appointments, medications and unforeseen costs such as replacement of items lost or furniture/car repair.

Step 2: Average Monthly/Weekly Expenses

Once you have a full-year figure of expenditures, divide by 12 or 52 to see what you spend on average per month or week.

Step 3: Compare Expenses to Income

The goal is for your expenses to equal your income. If you can save 10% of your income toward pension, this is highly favorable.

The “60% solution” budget recommends the first 60% of your income going toward the heavy-duty and necessary expenses such as bills, loans, debt payment and utilities. The rest can be used for everyday and “fun” spending.

Cutting Costs

Reducing your fixed expenses is tougher than cutting back on variable and smaller costs, but both are possible. Here are some of the major ways to save:

• Utilities: Learn to live with less air conditioning, and in the winter use blankets in exchange for lower heating costs. Find out if your digital cable and phone service are the best deals available. If single, eliminate your landline phone service and use your cell only.
• Food: Favor cooking over restaurants, and pack lunches to work. Organize potlucks or dinner parties with friends instead of making plans based on eating out. Shop at larger supermarkets or wholesale stores rather than gourmet markets and make your own dishes instead of buying pre-packaged ones. Make your own coffee.
• Transportation: SUV and sports cars can be exchanged for more fuel-efficient varieties. Arrange carpools for your kids or for yourself to work. Using public transportation saves. Or save on gas entirely and invest in a bike. (This can justify canceling your gym membership as well!)
• Shopping: Wait for items to go on sale before purchasing, especially at large chain stores. Think twice before buying, or only go shopping with friends who have voices of reason. Sell old items you no longer want on E-bay. Get a stylish friend to cut your hair, and cut your kids’ hair yourself.
• Housing: Put an ad up for a roommate. Consider moving to a less-expensive neighborhood.

Extra Cash?

If you have extra money per month, put it in a savings account or invest it. Don’t just let it sit in your wallet, or it will likely be spent. If you are like many Americans, and your spending exceeds your monthly budget, it’s probably time to cut a few costs and smarten up about your spending.