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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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budget-pie-chart

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 GNUCash. The first uses the included budgeting system to set and track your monthly budgets, the second involves an envelope system made up of GNUCash accounts, and the third uses GNUCash reporting along with some means of setting and tracking your budget outside of GNUCash.

Built in Budget Tool

To get started with the built in GNUCash budgeting tool you need to first create a budget to work from, this can be done by going to the File Menu and selecting New -> New Budget ->. This will bring up a listing of all of your GNUCash accounts and a timeline of months.  To set a budget amount for each category you can either enter the amount directly in the corresponding field or have GNUCash estimate your budget based on previous spending.  Under the options you can set the name of your budget, and the budgeting period either daily, weekly, monthly, or yearly.  Once you have saved your budget you can come back to it anytime by going to File -> open -> open budget.  Tracking your progress is as easy as running the budget report where you will see your actual expenses compared to your budgeted and if you mark the right option you will see the variance.

Because of the way GNUCash tracks your paychecks and loan payments you aren’t going to see your loan spending as a whole payment but as a separate expense for interest and principal. One under liabilities, the other is under expenses. You can pick and choose which accounts you want to see in the budget report by deselecting those you don’t want under the report options. If you rename the report it will allow you to save it as new report so you don’t have to customize it again.

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