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Budgeting

pigeon_lose_fingerSo far we have talked about tracking your spending, and setting up your budget. In this last installment of my Budgeting 101 series I want to touch on some of the problems people encounter with budgeting. Your budget is a fluid thing and requires periodic updating, no less than once a month you should be sitting down with your spouse or significant other and realigning your budget with the upcoming months requirements. I even know of some people who set weekly budgets to allow for more fluidity in their spending throughout the month. Your spending is going to change from month to month, so should your budget.

Tracking your spending gives you a general idea of where your money went but won’t always predict where it will go in the future. You may not always have the same items in your budget, you may need to add a budget item for a gift for upcoming birthdays or medical procedures.  The key is to constantly be reassessing your needs and wants and adequately budgeting both. Include your savings and debt payments and as your priorities change alter your budgets accordingly.

If you don’t adequately account for your projected spending and realize emergencies happen, you are going to fail to maintain your budget.  Once you start to fail to meet your budget goals you will want to stop budgeting.   Don’t stop budgeting just budget better, learn from your mistakes and do what works for you, eventually you will become a master of your budget, and your finances.

There are so many reason budget can fail to work effectively. Usually they are related to the budget setters not being committed to the budget, just like a diet you have to commit to it, not just go through the motions.

Don’t just take my word for it though, here are several reasons why budgets fail, submitted by the twitter faithful, if you didnt’ get a chance to be included you may not be following me.

@JeremyVoh: Budgets fail like diets fail. People try to make a sudden drastic a change to their lifestyle. Old habits prevail.

@ManVsDebt: People make them too complex. The more simple your budget is the higher probability of you adapting the process as a habit!

@Matt_SF: Budgets fail b/c of frustration. Most people hate to lose, so if they fail once or twice, they simply give up.

@MyLifeROI: Unrealistic goals/expectations

@The_Weakonomist:unplanned expenses have to be the #1 reason.

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Now that you have spent a month tracking your spending, or at least gone back and accounted for a months worth of spending it is time to setup your budget. Next week we will talk about maintaining and reassessing your budget.

two_dollar_bill1

Creating a budget is the first step to financial freedom recommended by most personal finance advocates. There a many ways people go about creating and managing their budgets.  Budget software abounds everywhere from You Need a Budget, Quicken, GNUCash, to Budget Pulse, Mint, and beyond. You can also just use a simple spreadsheet or a piece of paper for your budget.

Budgeting in its simplest form is just creating categories for your spending and assigning yourself a maximum value for that category. A truly complete budget should result in a zero balance of cash for the month, everything coming in should be assigned to a specific category leaving you with no “excess” income. This way you know what you can spend and where you want to spend it. If you spend more in one category you will have to sacrifice in a category somewhere else.

Lets talk a little bit about the categories you are going to use for your budget. Categories you use for doing your budget most likely should not be as granular as the categories you use to track your spending.  Keeping your budget at a higher level keeps your budget smaller and easier to manage as well as ensures you are less likely to go over budget in a specific category.  I think most people give up on budgeting because they budget at too granular of a level and are constantly “blowing” the budget in certain areas.  This leads to discouragement and a feeling of failure that is easily removed by eliminating the pesky budget.  You should be granular but not so granular that you are spending an entire day updating your budget and reallocating funds. So while you may have a dining out budget item, you shouldn’t probably have a dining out: breakfast budget item.

Don’t forget to include your income, you can’t achieve a balanced budget if you don’t include the income as well as the expenses. Use your most recent paychecks to estimate if you are paid hourly, if you are salaried you should have a good idea of what your checks will be each month.

When looking back at your spending for the past month make sure you identify how much you spent on each of the categories you have chosen for your budget. You can use this amount as a basis for how much to budget. Determine how much money you want to go to each category, be sure include your savings and other investments, as well as your estimated income, keep in mind you want to end up with 0 dollars left over.

If you haven’t already you need to site down with your spouse, significant other, or whatever and discuss your budget. You both need to agree to the budget and agree to stick to it. Otherwise you are almost certain to fail, trust me, I know.

If you are interested in a simple spreadsheet for setting your budget moving you can view my GoogleDoc Budget Sheet

Photo: (doublep)

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This is the first part of a three part series on budgeting I plan to run for the next three Wednesday’s.  I will discuss what I feel are the three critical pieces of budgeting, 1.) Know Your Spending, 2.) Creating Your Budget, and 3.) Tracking and Reassessing.

Creating a budget is the first step to financial freedom recommended by most personal finance advocates. There a many ways people go about creating and managing their budgets. Systems like You Need a Budget, Budget Pulse, Mint, and beyond all include budget calculators you can use to help set your budget. Before you can effectively setup your budget however you need to make sure you know exactly where your money is going. Too many people sit down to create a budget and arbitrarily assign values to their budget categories based on a guess of what they think they are going to spend.  This may work for some but when you are spending $400.00 a month eating out and you assign that category $100.00 in your budget you are going to fail pretty quickly.

For at least one month, more if you can go back in time, you need to track and see where every penny of your money is going. Start tracking your expenses under the following Major categories: (more…)

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Budgeting With GNUCash

April 8, 2009

After writing my “Using GNUCash to manage your personal finances” series I have been getting quite a bit of traffic looking for information on Budgeting in GNUCash. I touched on it lightly but I don’t think I really did it justice. The way I see it there is three schools of thought on budgeting in […]

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