There’s been a lot of talk recently about budgets – and the importance of sticking to them. But if you’re an average Joe or Jane, where do you start, and how detailed of a budget do you need? Matt Allgeyer, Financial Planner from Wamhoff Financial Planning & Accounting Services, reviews Budgeting 101.
1. Where to start
- Analyze your fixed bills – bills that you have to pay on a regular basis. Look at this monthly, quarterly every six months, and annually.
- Look at your other expenses outside of your fixed bills. This could include things like entertainment, meals, subscriptions, health care and prescriptions, etc.
- Don’t forget to include special expenses like holiday and birthday spending, vacation spending, etc.
- Figure in your savings goals. For example, if your goal is to save 10% of your income, be sure to include that as part of your budget.
- Break your spending into categories that make sense for your household and the way you live. Common categories include housing, transportation, fuel, utilities, groceries, entertainment, etc.
- Be honest, and log everything! Your budget is your plan and it’s something you should commit to, so no cheating.
- Measure all of your expenses by category to ensure you stay within budget.
- Again, take an honest look – do you have the income to justify your spending? If not, be prepared to make some adjustments to your lifestyle.
- Put all of this information into a tool that is easy to use and track. This could be a simple spreadsheet, or a program such as Quicken or Microsoft Money.
2. Money wasters that can blow your budget and long term financial goals
- Frequent ATM withdraws and associated fees.
- Forgotten debit card transactions
- Making large purchases you can’t afford or aren’t prepared for.
- Just considering a monthly payment. Look at the purchase price, not the monthly payment price. If you only consider the payment, you could be overpaying.
- High interest rates cause you to get upside down really quickly, especially on a large purchase like a car.
- Taking money out of your 401k or retirement plan. Chances are you’ll never put it back, and be subject to tax penalties.