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Budget. It almost feels like a four letter word. It makes people fidget and feel like they are going to suddenly be denied things they want. It doesn't have to be that way. In fact a budget can be very freeing and make ongoing spending decisions much easier. The key is that it needs to be realistic for you.
So where the heck do you start? I must say I was very loosey goosey with budgeting for many years. I knew what I got paid, I had a system in place to pay myself first and the rest was free game. I didn't plan out my spending, but somehow I managed to stay on track and live within my means. With the exception of a brief stint in my mid-20's where I got a little carried away with the credit card, debt and staying within budget has been a non issue for me. That is, until recently when I made the jump to full time self-employed. Now all of a sudden, budget is the name of the game for success.
Creating the Budget
The place to start is right where you are. You must first evaluate your current financial status. Specifically, go back over the last 6-12 months of financial records and determine how much you spent and what you spent it on. Don't get obsessed about detail (believe me, I've been there and done that), but on the flip side, you can't have line items like $200 spent in Wal-Mart. OK, but for what? Clothing? Household supplies? Chocolate? Electronics? I've found it helpful to stick to some top level categories such as:
-- Household: Home Repair
-- Household (General)
-- Groceries
-- Clothing
-- Personal Care
-- Medical
-- Insurance
-- Taxes
-- Dining (aka eating out)
-- Entertainment
-- Auto
-- Interest Expense
-- Charity
-- Savings and Investments
-- Travel, Vacation, and Fun
You can tailor them however you like, the point is just to have broad enough categories that you don't turn into a bean counter, but detailed enough that you can do some meaningful refining and tracking.
Of course you'll also want an Income category (you can break it down into multiple sub-categories if you have multiple income sources).
Once you get this information for the last 6-12 months, you can then divide it out to come up with a monthly figure. This becomes your historical guidepost. If you subtract the expenses from your income for each month you can see at a quick glance whether you are living within your means or beyond it.
Once you have this information, you get to create a budget. What I typically do is add a fudge factor of 5-10% to each category and make that my ongoing budget. Of course that only works if you are happy with your current savings and spending. If you are living beyond your means, you first want to go through these categories and realistically determine which ones you can reduce and by how much.
Let me pause to say that if you're not careful this exercise can just set you up for misery and self-sabotage. If you create a budget which there is no way in hell you can stick to (it is more wishful thinking than financial guide) and then set yourself up for failure. So be realistic. And, if you find that you are living beyond your means -- now is the time to do something about it. You have two choices - reduce expenses and/or increase income. Increased income is always great, but remember the richest people in the world are not necessarily those who earn the most; they are those that keep the most.
Sticking to It
Sticking to a budget is not an all or nothing affair. It is about knowing what you committed to in terms of spending for each category and then doing your best to stay within that commitment. Life does happen from time to time and you will go out of budget. Be kind to yourself. The important thing is to always note what your relationship is with your spending. It is like emotional eating; sometimes you just spend and don't even consciously know why. That extra latte, the quick trip to the bookstore, an extra beer with girlfriends, or any other expense that seems small and minor yet adds up. That doesn't mean you can't treat yourself - in fact you must! That is why I recommend budgeting
