Series: Spending Money

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A Plan for All Seasons Terms of Use:

Budgets are kind of like exercising. You know you should do it, but may not get around to it. Like exercise, budgets also require some discipline in order to stick with it.

A team of psychologists once studied 12,000 Americans for 25 years. One of their findings was that 60% keep at a budget. Of the people who didn’t keep a budget, one in four was constantly in debt.

So, what’s the biggest reason for budgeting? You’ll better manage the money you have now and be able to save more for the future.

What exactly is a budget? A budget is a written estimate of how much money you are making and spending over a period of time.

A budget is not the same as financial planning. A budget is a short-term plan for a period of one month, six months or a year. Financial planning is about long-range goals such as paying for college and retirement.

There’s no ideal way to create a budget. Yours needs to fit your style so that you feel comfortable using it as a guide. You can create a budget on paper or use a software program.

Budgets are made up of two parts: Part 1 is your salary and any other source of money you have like interest or dividends. You add up all sources of money you receive to figure how much income you have available to spend each month. That’s the easy part.

Part 2 is a bit tougher. Here you list how you spend your money. List your monthly expenses by category such as housing, transportation, electricity, phone, debt, entertainment and so forth.

The first step in creating your list of expenses is to keep track of every dollar you spend in one month’s time. Every time you pay a bill or buy something, just jot down the item and the amount spent on a pad of paper kept just for this purpose.

If you’ve never done this before, it can be a real eye-opener to finally keep track of how much you spend on things like fastfood, CDs, clothing, and other small items. One man discovered he was spending $600 a year on donuts! You might find a surprise or two, also.

Series: Spending Money

Page 2 of 2

A Plan for All Seasons Terms of Use:

It may be tempting, but don’t skip this first step as it is important to find out where your money really goes, not where you guess it goes.

The second step is to develop your working budget, based on approximately how much you spend in a typical month. Some categories, like rent or mortgage payments are easy because they’re the same amount every month (fixed expenses).

Subtract all your fixed expenses from your income. That’s the money you have left for variable expenses. Variable expenses are ones that you have some control over, such as clothing and groceries.

The best way to estimate your variable expenses is to look at what you spent last year in the same month.

The hardest expenses to estimate will be unexpected ones like car repairs and house maintenance.

Once you figure out how much you’re spending in each category, add them together to get a total of your monthly spending. Subtract this amount from your income. Our budget calculator makes this step easy (see related links below).

If you are earning more than you are spending, you can use that money to pay off your debts faster, save up money for investments, and plan for big things like a new house, college, or retirement.

If you are spending more than you are earning, then you have to cut back on your variable expenses. See the related articles below to discover if you are buying things that you don’t really need.

Once you write down your budget, then the word “budget” becomes a verb meaning “to stick to the budget” that you wrote down. For example, “let’s budget in a movie.”

Your budget can help you plan ahead for extra money you spend during holidays and vacation times, too.

Your budget will give you a sense of control over your finances, and reduce stress and worry about money.

So now that you’ve spent the time to create a budget, just like exercising, it’s important to keep at it and realize it's worth it in the long run!

For tips on how to save money on almost everything, check out the related links below.

See what you learned.

Check out "Smart Spending: Needs vs. Wants" and "Fixed & Variable Expenses"