Which word do you hate more: budget or diet? Both conjure up images of having to live without something you want. Cookies, chips and ice cream if you’re dieting, and new shoes, a giant TV, or a quick weekend getaway if you’re living on a budget.
But here’s the truth: a budget isn’t a bad thing at all. In fact, if it’s done correctly, it can help you live a better, less-stressful life.
If you’re the type of person (I sure was!) who tends to buy what you want, when you want it and hope that it all works out somehow at the end of the month, the thought of having a budget sounds like a lot of work and certainly no way to enjoy yourself.
But it’s just not very smart. Whether you’ve got more than enough or you’re barely covering your bills, you should know how, when and where you’re spending your money. How do you think rich people get that way?
To make this a little easier to digest, we’re going to get rid of the word “budget,” and replace it with “spending plan”, which sounds both easier and more fun.
Coming up with a spending plan is easy. All you have to do is figure out exactly how much is coming in and going out every month, and then set up some savings goals.
First, write down all your fixed expenses including mortgage or rent payment, car payment, insurance, cell phone, cable and utilities. If some of these vary month to month, pick the highest amount you’ve paid and use that. Don’t forget to include saving as one of your fixed expenses. Ideally, you should earmark about 10% of your income to go into savings. (Saving is NOT optional, an afterthought or done “if I have any left over!”) If you’re paying off any debt, plan for a set amount that’s larger than the minimum required payment.
Next, look carefully at your discretionary spending: dining out, clothes, coffee runs, movies, groceries, travel. Be sure to go through your checking account and credit card statement to get an accurate picture of where your money goes. If you frequent the ATM, write down everything you spend for a week to give you an idea of exactly where your cash is going.
A big no-no? Establishing a “Miscellaneous” category. I made the mistake of having one and it often totaled more than all my other categories! Spell out in detail exactly what you’re spending your money on in order to track and control it.
If the numbers don’t add up - if you’re spending more than what’s coming in or you have nothing left to go into savings - you need to adjust your priorities. Look at all your discretionary spending and see where you can make high-impact adjustments. You may have to cut back on how often you dine out or go to the mall. You can also call your cell phone, cable and insurance providers and negotiate better deals. Most are willing to work with you because they want to keep you as a customer. (I do it all the time and they always lower my bill!)
Finally and very importantly, set up some short and long-term goals: the latest laptop, a new car, a family vacation or a larger home. Don’t forget to include an emergency (the dog needs to go to the vet!) or mad-money (last-minute invite to a weekend getaway) category that can cover unexpected expenses.
Being in control of your money instead of at its mercy is empowering. You’ll sleep better at night knowing you can meet all of your financial obligations and that you’re saving for the future. Just remember to re-evaluate your spending plan frequently (try every quarter) so you can respond to lifestyle changes and make any necessary adjustments.