Budgeting in Just 4 Steps

Budgeting in just 4 steps! The traditional definition of a budget is an estimate of income and expenses for a set period of time.   A budget for me is a structure for achieving a financial goal.   It helps you track your income and how you spend your money.  My approach is to start with my financial goal and I make changes in my spending to achieve it.  Do you use a budget?

Step #1

Before you can make changes to your expenses, you first need to be aware of where you spend your money.  If you were trying to lose weight, you would make a food diary.  You would create a diary of everything you eat.  Tracking your expenses starts with a diary of where you spend your money?  You have to know where you spend your money in order to manage your money.  You have your list of your expenses, what else you spend your money and what you would like to spend.  What is your financial goal?  Is it to reduce debt, increase savings, make investments or just control your expenses?

Step #2

Analyze your expenses!  Where can you reduce your expenses without changing much?  For example, you could replace your lights with compact fluorescent lamps (CFL) and save some money on your utility bill.  You are not giving anything up, but you will need to invest some money in CFLs.  Aside from significantly reducing your utilities, CFLs last 10,000 hours.  You could take your lunch to work a few days a week and save over a hundred dollars per month.  Small changes in your expenses can yield huge rewards.  I wrote an article called “10 Changes Can Make Millions” that provides ten small changes would yield enough to earn over a million dollars over your working career.

Step #3

Some people use budgets to control their expenses.  I don’t think you need a budget to control your expenses.  Establishing a budget, you will set spending limits for categories of expenses and you can use those limits to control your spending.  In fact, I regularly check my spending every time I pay my bills.  I have the additional motivation to wring out every extra penny from my expenses.  Never accept the status quo!  You can either cut the expense such as cable TV or find ways to reduce it or cut somewhere else so you can keep it.  Extra money can be used to pay down debt or add to savings.

Budgeting can force you to get organized, but you do not need a budget to get you organized!  Systematically looking at where you spend your money will help you reduce or change your expenses.  Automate where you can such as mortgage payments, car payments, loan payments, and insurance payments to name just a few.  The more expenses you can automate, it will help organize your finances. It will save your time and avoid late fees.

Step #4

Since you are starting with the goal in mind, Steps 1-3 will help you achieve your goal.  For example, you want to save $2,000 per month.  Up to now, you have only achieved $1,000 per month.  Your task will be to find that additional $1,000 by cutting or changing your expenses.  Another choice would be to find an additional $1,000 in income.  If you are increasing your contribution to your 401K, there will be a reduction in taxes that will help approximately 15-25%.  By starting with the goal, you can be more focused at a specific number to achieve.  If the dollar amount is for retirement savings or debt reduction, set up a payroll deduction to make it automatic.

Wrap Up

Spend less than you earn is the advice most people will tell you.  I will take it a step further that you should include savings in your budget.  Savings can range from 10% of your gross wages to maxing ($17K 2012 contribution) out your 401K.  If you start with your goal, it will help you quantify how much you must cut or reduce your expenses.  Remember that your budget should include those yearly expenses that come up once or twice a year.  Insurance, real estate taxes and tuition are not monthly expenses; however you can set aside the monthly portion so you will have it when it is due. You can do budgeting in just 4 steps!

Photo by:  Flickr