To build a realistic financial budget, start by figuring out where your money
goes now. There are three steps to creating a budget:
1) Identify how your money is currently being spent.
2) Evaluate that spending to see if it meets the financial priorities you
specified in Lesson 1.
3) Track your ongoing spending to make sure it stays within those guidelines
(or to understand how your budget needs to be revised).
If you happen to use Quicken, Microsoft Money or other such software, you're
in luck. These programs generally make it easy to draw up a budget.
In Quicken, for example, every time you make a deposit, write a check, pay a
credit card bill or dispatch an electronic payment you are asked to assign it to
a particular category, such as "salary," "clothing," "groceries," "child care"
or "health
insurance."
You can also create subcategories, dividing "auto" expenses into "fuel,"
"insurance" and "service." The program comes with a set of categories that
handle most of the basics. You can edit the list to create categories that make
better sense for your particular household.
The drawback, of course, is that entering and categorizing all of your income
and outflow is a tedious chore.
You can reduce the tedium by judiciously selecting categories. Let's say you
are only worried about tracking your spending for recreation and leisure
pursuits. You could create categories that cover those types of expenses, and
let everything else accumulate under "miscellaneous revenue" or "miscellaneous
expense."
The problem with that approach is that you forgo the opportunity to spot
problems in other spending areas that you may not even be aware of.
A better solution is to
track
expenses using electronic banking. That way, you can download your payments
and deposits directly from the bank, rather than having to enter them by
hand.
The downloaded
banking
transactions generally show up without any categorization - meaning you'll have
to add the categories by hand. But if you use a credit card that is issued by a
bank that permits electronic access, then the downloaded charges from your card
sometimes do come with categories attached (they aren't always right, so check
them).
Either way, once you've got your spending tracked by category, drawing up a
report requires only a few clicks of the mouse. Even better, such programs often
have an automatic budget-creation feature that scans your spending in the past
in order to estimate how much you'll spend going forward.
If your finances aren't wired, you can still get a good handle on your
spending the old-fashioned way. Start by getting all your records together from
the past 12 months, including pay stubs,
loan
proceeds, withdrawal slips, canceled checks and itemized credit-card statements.
Then go through them and compile totals for your income and expenses in a set of
categories that makes sense for you.
At the end of this exercise, you may still have a sizable lump of spending
that's undocumented - typically, the money you withdraw in
cash
and then spend on day-to-day needs. If this portion of your budget seems to be
getting out of hand, keep a journal for the next four weeks in which you record
every nickel you spend. You can use those results to extrapolate how your cash
is being spent throughout the year.
Now that you've got a good picture of where your money is going, you can
proceed to evaluate which parts of that spending should be raised or lowered.
Another installment form Money Magazine.
