Budgeting Money 101

Introducing the Concept of Personal Budgeting

What is budgeting money? In simplest terms, budgeting is aligning your current expenses to your income, and to your future goals. When you take the time to do a budget, it helps ensure you don't spend money that you don't have or can't repay.

What happens if you spend more than you should? Nothing may appear to happen at first, other than enjoying your purchases. But soon, you may find that you don't have enough money to pay for things you need or to cover unplanned expenses.

The worry that overcomes you is only the beginning...

If you continue to spend and don't keep track of where your money is going, you are vulnerable to serious financial trouble. As your spending continues to exceed your income, credit card debt and loans will spiral out of control. In a short period of time, you may find yourself on the unfortunate road to insolvency.

Yet, this doesn't need to happen if you take control of your spending. And, that's where budgeting money comes into play. There are five steps related to the concept of budgeting money.

Step 1: Know how much you make... your income.

Step 2: Figure out where all that money is currently going... your expenses.

Step 3: Identify your short- and long-term goals from a financial perspective. In other words, what do you want to accomplish and how much money do you need.

For example, do you want to buy a car in the coming year? Are you planning to go back to college? Is your goal to buy a home for your family within five years?

Important Note: There are two imperatives with goal setting.

  • First, if you have existing credit card debt or loans, paying off your balances must be a short-term priority.
  • Second, you need to include saving for retirement, as your most important long-term goal.

Step 4: Devise a spending plan that enables you to adequately cover your expenses with the income you make each month. This includes allocating a specified amount of money every month to deposit into two different savings accounts.

Use the first savings account to deposit money towards your financial goals that you outlined in Step 3.

The second savings account needs to be a reserve or emergency fund to protect you in the event of unforeseen circumstances. Contribute a little each month to this reserve fund until you have four-to-six months worth of income. Then, don't touch the money unless it is truly an emergency.

To make your budget, you can use a spreadsheet program, special budgeting software, or pen and paper. Begin by listing your income by month for the year. Then list each expense category by month for the year. Include your projected spending in each category, based on the research you did in Step 2.

Add up your expenses each month, as well as annually, and compare them to your total income. Your expenses should be equal to or less than your income. If they are higher, you need to adjust your spending to make your budget work and achieve your goals.

Step 5: Stick to your budget each month. Spend only what you earn, including saving money to achieve your goals and plan for the unexpected.

So does budgeting money sound easy? Well...

  • Step 1 is the easiest part.
  • Step 2 is the tedious part.
  • Step 3 is the pivotal part.
  • Step 4 is the trickiest part.
  • Step 5 is the hardest part.

Here's why...

Most people know exactly how much they make each week and month. We all take time to review our paychecks and almost always know what to expect. That's why Step 1 is the easiest of the five steps of budgeting money.

Step 2 is wearisome because it involves researching and tracking every dollar you spend for two months, so you have a clear picture of your monthly expenses. To paint a realistic picture of your spending, you need to review your check book, credit card bills, and document what you spend for housing, food gas, maintenance, utilities, phone, clothing, sundries, television service, entertainment and other items.

If you don't want to track your historical spending, you can keep a conscientious tab of every expense for the coming two months to get those numbers for budgeting money.

Step 3 is pivotal because it guides your future savings, spending and lifestyle. Here, you are planning for your goals and dreams. And, that's what life is all about.

With Step 4, you need to determine which of your expenses from Step 2 need to be cut to accommodate your goals in Step 3 – all the while ensuring your spending is less than your income.

As noted, Step 5 is the most difficult because it requires that you stick to the budget you have developed month after month. The good news is that it gets easier over time.

Having detailed expense categories enables you to easily monitor your spending and know where your money is going. Then, you can make adjustments and changes along the way... all with an eye to achieving your short- and long-term goals.

One final note...

If your income changes, you need to revise each step of your budget. If your earnings go up, consider putting the additional money into savings or paying off debt earlier than planned. If earnings go down, you need to adjust how you spend your money and update each budget step.

For more information, please see the related article links below.

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