Budgeting 101

Do you use a budget to track your living expenses, spending allowances and savings goals? Budgeting is probably the single most important way to get ahead of your debts and build a financially secure future. So many people and families operate without a budget - although with the financial crisis of our country (it seems the government doesn't know what a budget is sometimes either) keeping track of your money is more trendy than ever.

The hardest part about starting a budget is sitting down and taking a hard look at your bank account. Once you get over the "hump" of financial denial and open your eyes to your spending, building a framework for your finances can be pretty easy.

1. Step One: Open your last three bank statements and review where your money has been going.
   This can be a scary thing, and if you are a big spender all the lines of transactions may blur together. It may be helpful to get hard-copies of your statements and get four different colored hi-lighters (example: pink, yellow, blue and green). Then highlight the transactions based on what they are so that you can visually categorize how many of each type of transaction you have and start tallying your totals. Your categories might be:
1. Pink: Living expenses such as mortgage/rent, utilities, groceries.
2. Yellow: Loan and credit card payments.
3. Blue: Entertainment, shopping and travel.
4. Green: Transfers to savings, retirement funds, etc.
2. Step Two: Make a chart with a total of how much you spend per month on average (using the previous three month's data).
   You will probably be surprised to see how much money is leaving your bank account each month, and where it is going. 
3. Step Three: Decide which spending habits you want to keep, and which ones you want to change.
   It can be hard to change the way you shop, dine and travel, but once you're informed with where your finances are you CAN make a difference in your financial future. Building a budget doesn't mean you have to stop all the things you enjoy doing. It just means keeping track of the essentials and setting limits on the extras. Plan on big ticket items (home/auto maintenance, travel, gifts and holidays) ahead of time so that when the need arises you have cash to spend instead of needing to charge credit cards. 
4. Step Four: Make a plan and DO IT.
   The biggest reason that budgets don't work is that the people who need them don't use them. If being on a monthly budget scares you, start off with a weekly budget and just see how it goes. Adjust and refine your budget at the end of the time you've set (never on a day-by-day basis, and never mid-way. If you set a budget for a month, do it for a month; if you set it for a week, do it for a week) until you  find the budget that works for you.

Some budget stories from the front lines:

I've been building budgets since I was a kid, and I've helped lots of friends, family and customers to get their finances in order. Here are just a couple of notes from people I helped, and some simple changes they made to save money.

• I once prepared a budget for a friend and she discovered that she was spending over $200 a month on her morning coffee! She was struggling to make her credit card payments and discovered that she could make the minimum payment and add extra each month to start paying down her balance if she'd just brew coffee at home and drink the shared office coffee instead of going out to Starbucks every morning and afternoon.
  
• I had a customer who wasn't able to pay her mortgage. After a short conversation about her spending habits, it turned out that she was making payments on three new cars. It didn't take long for her to see that if she sold two of the cars (one she had purchased for her teenager to drive and one that was a secondary family car) the difference in her auto insurance and the two loan payments would cover her entire mortgage payment.
  
• Another friend of mine spent his paycheck as soon as he got it. A grown man who had never been taught about finances, he would quite literally shop until his debit card was rejected at the checkout stand. By sitting down with his bank statements and showing him exactly how much money he was making after taxes, and showing him how to track his spending (a.k.a. balancing the checkbook) he was finally able to start a savings account for the first time in his life. Within two years he was completely out of debt.