A budget is important for keeping finances under control, but life is a lot more chaotic than a neatly-planned spreadsheet suggests. Budgeting doesn't seem productive or realistic, since unplanned expenses are part of life and sitting down to enter receipt totals takes up time you don't have. That doesn't mean you should give up altogether on balancing your income and expenses. With work and patience, developing a budget that fits your lifestyle is an accomplishment that's well within reach.
1. Calculate your ideal numbers. As a general rule, you should be spending no more than 35 percent of your net income on housing, 15 percent on transportation, 15 percent on debt repayment, 25 percent on other life expenses and 10 percent on savings. These numbers won't be part of your final budget, but they'll help you assess how you actually spend.
2. Review your financial statements for the last month, calculating how much you actually spend in each of the five categories. Figure out where you need to make cuts to balance your budget. It's OK to spend slightly more or slightly less than suggested in a category, but if you spend more in one area of your budget, that means cutting back somewhere else.
3. Commit to realistic changes to reduce your costs. Adjustments that fit your lifestyle allow you to cut costs, while trying to make out-of-character changes could doom your budgeting attempts to failure. For example, maybe your family spends a lot on fast food dinners because you often work late. You could make cheaper, home-cooked meals more often by whipping up dinners on the weekend when you have more time, then freezing them for later use throughout the week. Because you're so short on time, starting a garden to reduce food costs is a less reasonable suggestion.
4. Leave room for the occasional indulgence, even if you're drawing up a tight budget to pay down debt or increase your savings. If you're a wine lover and your budget denies it completely, you're more likely to fall off the wagon. If you enjoy wine with dinner every night, but cost has become a concern for you, reduce the amount you drink without cutting it out completely.
5. Anticipate large expenses and pay for them over time. You don't want to blow your budget because you decide to go on vacation in March or buy Christmas gifts in December. Estimate how much you'll spend on these big-ticket items, then deduct money from the corresponding expense category for the remaining months so you'll have reserves to spend when the time comes.
6. Split your savings into separate accounts, maintaining a pool of money for each of your objectives. Not only does this strategy help you see how much you have set aside in each category, but it allows you to choose accounts based on what you're saving for. For example, you need money in your emergency fund to be easily accessible, while retirement money can be tied up for much longer in higher-interest savings vehicles.
- Try different methods to keep track of your spending until you find one that works for you. Some people watch their pennies by entering their receipt totals into a spreadsheet program. Others live on cash, keeping money for each expense category in separate jars or envelopes.
- Reassess your budget when your circumstances change. For example, if you get a raise at work, that affects how much you can spend in every category.
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