A budget is an itemized summary of likely income and expenses for a given period.  It helps you determine whether you can grab that bite to eat or should head home for a bowl of soup.  It is typically created using a spreadsheet, and it provides a concrete, organized, and easily understood breakdown of how much money you have coming in vs. how much you are letting go.  It’s an invaluable tool to help you prioritize your spending and manage your money—no matter how much or how little you have.

You can never learn too many budgeting tips so check out the following list that everyone needs to know. The sooner you implement these, the sooner you’ll reach your personal money goals!  As you create and maintain your budget, you’ll want to keep these valuable suggestions in mind.

Here are 10 important points to keep in mind as you create your budget and identify what goes into your income and expenses.

1. Overestimate your expenses. It’s better to overestimate your expenses and then under-spend and end up with more to save or reallocate.
2. Underestimate your income. It’s better to end up with an unexpected cash surplus rather than a budget shortfall.
3. Prepare for the unexpected by setting saving goals to build your emergency fund. Budgeting will help you cover unusual expenses and plan for unexpected circumstances that may occur.
4. Budget before the month begins.Budget before you start spending. That way, you’ll know exactly what you can spend the next time you’re in the sale aisle at Target.
5. Budget to zero.Name every dollar down to zero. So if you make $5,000 a month, you need to budget $5,000 a month. It’s that simple.
6. Track every expense.Keep up with how much you’re spending on gasoline and groceries by tracking transactions as you go.
7. Save an emergency fund.The best protection for your budget is a solid emergency fund. Start by saving $1,000 (and eventually build up to three to six months’ worth of expenses). That way, you won’t need a credit card when the unexpected occurs.

 

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Remember that the goal of budgeting is to spend less than we make (i.e., to save money). One of best ways to do this is to save first. Rather than saving what is left over at the end of the month, save first and spend the rest. This strategy takes advantage of behavioral finance. By getting money out of your checking account and into savings first, we are less likely to spend our savings during the month.

Try the 50/20/30 Plan. With this plan, 50% of income goes to necessities, 20% to long-term savings, and 30% to lifestyle choices. This plan can be a good starting point for those struggling to decide just how much they should spend on individual budget categories.

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8. Save 15% for retirement. Once you’re out of debt and have a three to six-month emergency fund in place, start saving 15% for retirement. Your future self needs money too.
9. Budget some fun money.We all need some fun in our lives. Go ahead and give your budget permission to let loose within a set dollar amount.
10. Set realistic limits.Look at the past few months to get an idea of how much you’re paying for clothing, coffee and restaurants. Find a happy medium and then stick to it.

Differentiate Between Needs and Wants

One benefit of budgeting is that it helps you determine if you have the resources to spend on items that you want versus those you need.

• Start by making a list of things you’d like to save up for.
• Identify whether each item on the list is something you absolutely need or is really a want.
• If you decide you want something, ask yourself if you will still be happy you bought the item in a month.
• Next, prioritize each item on the list.
• Once you have set your priorities, you can then determine whether you should incorporate each item into your budget.

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First Step My Needs and Wants	Second Step Need or Want?	Third Step Priority Importance? 1=must have 2=really want 3=would be nice
Save for a vacation	Want	3
Buy a new computer	Want	2
Go to college	Need	1
Buy a better car	Want	2
Save for an emergency fund	Need	1
Save money for a down payment on a house	Need	3
Pay off credit cards	Need	1

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Pay Yourself First! Include “Savings” as a recurring expense item in your monthly budget. Small amounts that you put away each month definitely add up.

Expect the Unexpected! Your emergency fund should be used for expenses that fall outside the categories of annual and periodic bills. Unexpected expenses are the result of life events such as job loss, illness, or car repairs. Redefine your notion of “unexpected” bills to encompass these unforeseen events rather than more common but infrequent expenses. The good news is that if you do not use your emergency fund, you will have savings—which should always be a priority when managing your finances. And, if you have to use your emergency fund, you may avoid unnecessary borrowing.

Manage Your Budget. Keeping track of all of your spending may seem like a lot of work. But if you’re organized, keep good records, and use some of the following tips, you’ll find it’s easier than you may think. And, don’t be too hard on yourself if you slip up.

• Understand the Goal: The goal of a budget is not to track every dime we spend. That’s certainly one way to budget, but it’s not the goal. In fact, one can know where all of their money is going and still not have an effective budget. The goal of a budget is to help us control our spending so that we can spend less than we make and focus our spending on what matters most to us. However you choose to budget, it should meet this goal. If it doesn’t, you’re doing it wrong.
• Record your actual expenses. Have you noticed how fast your cash disappears? To get a handle on where you cash is going, carry a small notebook or use a phone app to record even the smallest expenditures such as coffee, movie tickets, snacks, and parking. Some expenses that are often ignored include music downloads, charges for extra cell phone usage, and entertainment expenses. Search for an online tool to assist you—many are free!

 

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Charge It!  Using your debit/credit card, paying with plastic is an easy way to monitor spending. If you need to know how much you spent on something during the month, you’ll have the information at your fingertips.

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• Organize your records. Decide what system you’re going to use to track and organize your financial information. There are mobile apps and computer-based programs that work well, but you can also track your spending using a pencil and paper. Be sure to be consistent and organized, and designate a space to store all your financial information. Good record-keeping saves money and time!

• Use the 3-Category Budget:  Given the goal of budgeting, most people do not need to track every dime they spend. For example, knowing how much you’ve spent on gasoline may be interesting, but if it doesn’t change your behavior, there’s no point in tracking this expense. Most people overspend in just a few categories. Common examples include eating out, buying clothes, buying gadgets, and entertainment. Using the data accumulated from tacking your spending, pick the three budget categories you’d like to bring under control, and monitor your spending in just these areas. The 3-Category Budget is easy to implement and can have a significant effect on your finances.

• Create a routine. Manage your money on a regular basis, and record your expenses and income regularly. If you find that you can’t record your expenses every day, then record them weekly. If you wait longer than two weeks to record information, you may forget some transactions and be overwhelmed by the amount of information you need to enter.
• Include a category in your budget called “Unusual.” There will be some expenses every month that won’t fall neatly into one category or that you couldn’t have planned for. An “Unusual” category will help you budget for these occasional expenses.
• Review your spending for little items that add up to big monthly expenditures. The daily cup of coffee and soda at a vending machine will add up. Consider packing your lunch rather than eating out every day. Spending $10 a day eating out during the week translates to $50 a week and $200 a month. A $5 packed lunch translates into a savings of $1,200 a year. Save even more by looking for ways to manage and reduce your transportation and entertainment expenses.
• Comparison shop. Comparison shopping is simply using common sense to compare products in an attempt to get the best prices and best value. This means doing a little research before running out to buy something, especially when it comes to more expensive items. Make the most of tools like phone apps for comparing prices and value.
• Use credit cards wisely. Think very carefully before you decide to get your first credit card. Is a credit card really necessary, or would another payment option work just as well? If you receive a credit card offer in the mail, don’t feel obligated to accept it. Limit the number of cards you get.
• Don’t spend more on your credit card than you can afford to pay in full on a monthly basis. Responsible use of credit cards can be a shopping convenience and help you establish a solid credit rating and avoid financial problems. Consider signing up for electronic payment reminders, balance notices, and billing statement notifications from your credit card provider.

• Use the Right Tools: Finally, using the right tool can make budgeting more effective and less painful. There is no single best budgeting application. What works best for one person might not work best for somebody else. Yet, there are several really good budgeting tools that are either free or very inexpensive. Many of these tools link directly to your bank account and credit cards to automatically download and categorize transactions. They also come with smartphone and tablet apps, and they provide a clear picture into how money is being spent.

If you’re new to budgeting, you may find yourself over or under budget in certain categories. That’s okay! Give yourself a few months to get it just right, and use these money tips to get it as accurate as possible. Remember, a budget isn’t static—it changes as your life changes. Keep your budget in mind as you make choices and lifestyle changes. New job in a new location? You may need to adjust the monthly gas expense for your car. Want to adopt a puppy? You’ll definitely need to check your bottom line and ensure that you can afford the upkeep. Keep a log of your expenses and don’t change your spending habits without first adjusting your budget because life is better on a budget!

I hope all the financial advice you’ve been receiving this year has been beneficial to getting you well on your way to financial freedom! Next month I’ll be sharing information about retirement planning.