Welcome back to the Amateur Financier, as we focus on helping you to keep your resolutions this new year of 2010. This time, we’re going to go over how to make (and more importantly, stick to ) a budget in this new year. This task seems rather daunting to many people, but it’s essential to good money management and keeping your financial house in order.
First, to create a budget. There aren’t any real tricks to it; you simply need to know your income (from your job, investments, and any other sources), your regular bills (utilities, mortgage/rent, investments, etc.), and average spending (for everything from your morning coffee to Christmas shopping). You can make a chart showing your income and comparing it to your expenses, as I did back in my financial lessons, and as long as you spend less than you earn, you’ll be golden.
One note: it’s easy to ignore abnormal expenses that don’t recur every month, such as Christmas spending or insurance bills that only come a few times a year. Rather that not including them and being caught off guard when they roll around, divide them up into regular monthly installments, and set aside that amount in a special, separate account. (It’s easy enough to create separate accounts using an online bank like ING Direct.) When it comes time to pay these bills (or do your Christmas shopping), you’ll have more than enough money set aside in your dedicated account (with the contributions and the interest that you earned) to cover your abnormal expenses.
Once you have a budget created, the easy part is over, and it’s time to get ready for the hard bit: sticking to a budget for the rest of the year. As with our last resolution to pay down debt, we’re going to make this one easier to follow up on by making it actionable, specific, and reasonable:
Actionable: ‘Stick to my budget’ seems pretty actionable, doesn’t it? But we can do a bit better; let’s add a regular review of our budget (and our attempts to stick to said budget) to our resolution. ‘Create a budget and review it regularly to see whether I’m following it’ makes us much more accountable to follow up on the budget, meaning we’ll be more likely to keep thinking about it and hopefully, following it.
Specific: Now that we’re decided to review our budget regularly, we need to decide how often to do so, and create a schedule about when we’re going to do so. Reviewing your budget on a monthly basis makes sense for most people; we tend to get most of our bills on a monthly basis (including rent, utilities, and credit card bills), so a monthly review while we’re paying the bills will enable us to multitask while staying on budget.
You don’t have to use a monthly schedule; a weekly or biweekly schedule could work as well, since most people collect their paychecks on a weekly or biweekly schedule, anyway, making it easier to determine where your paycheck should go. (If you do use this sort of schedule, you should consider applying my earlier comments about abnormal expenses to your monthly bills; putting aside one-fourth the cost of your monthly bills each week will ensure that you have enough to cover the bills at the end of the month.) I would advise against reviewing your budget less than monthly; it’s hard enough to knowing your income and expenses a month ahead of time, let alone trying to predict the next three months or one year when you sit down to create your budget. So our resolution now is, ‘Create a budget, and review it monthly to ensure that we are still meeting it,’ a much more specific resolution to follow.
Reasonable: How reasonable it is to stick to your budget will depend on how realistic you made your budget. If you like going out to the movies every week but only budgeted $50 a month to your entertainment expenses, you’re almost certainly going to go over budget every month. This is why regular reviews are so important; if you see you are going over your allocated amount in a particular area, you will have to deal with it. Perhaps you can shift your budget a bit to compensate; if you love movies, but don’t like to dine out that much, you could add more to the ‘Entertainment’ category and take some away from ‘Restaurants’, and simply try to eat out less.
In many cases, though, it might not be possible to shift your budget like this; you only have so much income (at least, in the short term; in the long term, you can start a part time business, take a second job, or do any number of things to boost your cash flow), and have to make choices about what to spend it on. If you can really only afford $50 towards your Entertainment budget, going out to the movies every week is probably not a good option. There are several tactics you could use to cut your entertainment spending; only go every other week, don’t get popcorn or a drink when you, or consider renting movies instead of seeing them in the theater. The point being, there are usually ways to cut your spending, if you’re willing to be flexible.
There you have it; the keys to sticking to your 2010 budget. Follow this advice, and you should have no problem sticking to a (reasonably designed) budget. Good luck budgeting for a whole new year!