The budget has to be the outcome of an overall goal setting process. I know many folks who use budgets to try and control their spending, but they almost always commit the terrible mistake of setting their spending budgets based on past spending habits. This only institutionalizes the bad habits that have developed over the years.
I recommend that folks start the budgeting process by defining the goal. Is it to save $xxx this year? Is it to purchase a car without taking on a loan? Is it to pay off student loans? Etc. Make the goal as aggressive as you can, within reason. Next, carefully forecast your income, month by month for the next 12 months. Subtract your savings goal from your income projection and the result is your annual spending budget. Now, break down the annual spending budget into month by month, and line item category for each month. Categories are things like rent, groceries, insurance, etc. Once you have this all broken down by line item category, and month by month, load the budget into a budget program and start tracking monthly actual spending against the categories. As Oppmsu said, there are plenty of household spending and budgeting programs out there to choose from. Oppmus is correct that you’ll find areas of spending which you forgot when you established the annual budget. After a few months you’ll get those fine tuned. Just do not give up! After a few months, you may realize that your spending will exceed your budget for the year. At this point, you have to revisit your goal, and decide whether it needs to be revised to reflect a more realistic spending budget.
This approach to budgeting will force you, over time, to examine every little thing you spend your money on. Then, you can weigh that spending against your goals, and decide if it’s better to keep spending on that item, or to use that money to make headway toward your goal.
If you over spend your budget one month, then try to adust that month’s budget by taking budget spending out of a future month and moving it back into the current month, to offset that overage.
This may sound like a lot of work, but it produced results for me. In 1984, after a few years of falling further and further behind in the debt trap, my wife and I decided to establish a budget and hew to it. By 1992, we were totally debt free, including mortgage and car loans. This freed up our finances so that we were able to help our three kids through college without their incurring student debt.
I think the worst thing about debt is that it demoralizes a person to the point that he cannot fight back. Then he just slips further and further into the hole.
Oh yes, one other thing: for you married couples out there, the entire process must be a joint effort. It does no good at all for one spouse to embark on a financial management program without the buy in, support and input of the other.
- osb
