Budgeting 101: What is Budgeting?

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Many people find themselves in the difficult situation of “too much month at the end of the money!” Take consolation, because you are not alone, and we are about to answer the question, “what is budgeting?”

But first, let’s take a look at the problem of over spending. The average American household has a credit card debt of $8000! As a nation, Americans have some very unhealthy spending (or charging) habits.

The overwhelming trend is to buy what we want, when we want, as often as we want. And when we do, purchases are often made using plastic. We put aside the stark reality that sooner or later we are going to have to pay real money to cover the cost. And with today’s interest rates on most credit cards at around 20% A.P.R., pay dearly we will.

As if excessive or prolonged credit card debt isn’t bad enough, many people try to live a life style that in many cases exceeds their income.

Or, perhaps the Christmas holidays have come and gone, and because of thoughtless spending habits, you find yourself mired in a looming spectre of credit card or other acquired debts.

Budgeting

The only way to break reckless spending patterns and get out of debt is to take the bull by the horns and develop a well planned budget. But successful budgeting goes beyond the good intentions of developing a viable plan to not overspend. Successful budgeting requires commitment, action, and discipline.

What is budgeting, you say? It’s a responsible money-management plan, initiated by the small, nagging voice in the back of your mind that whispers reminders of the countless times you planned to save out a little cash. Only to have your good intentions tossed out the window by an impromptu trip to the mall and impulsive purchases.

The purpose of a budget is to stop over-spending by monitoring your cash flow, to stop the resulting debt from piling up into an unmanageable mess. It doesn’t help to try and justify your purchases. The fact is, the more you over-spend, the more hopelessly in debt you become.

Getting Started

Any successful budgeting begins with that daunting little word, “commitment.” In fact, the whole process begins and ends with commitment, carried out through action, which persists through discipline.

After you make a firm commitment to curb your spending and stick to a budget, you are ready for the action part!

When embarking on a household budget or a personal budget, the first step is to record all monthly spending, regardless how small the amount is or how trivial it may seem. Small purchases add up quickly.

It is equally important to stop charging with credit cards. If you can’t resist the temptation, freeze your cards in a block of ice until you are more disciplined. Or get rid of the cards entirely until you can handle them more responsibly!

If you are self employed or household spending is complicated to track, you may want to use budgeting software such as Microsoft Money. Budgeting software programs help you organize and prioritize and help accomplish the following:

• Categorize obligations and spending habits.
• Monitor and pay monthly bills such as mortgage, insurance, utilities, car payment, etc.
• Set up a manageable budget, a savings or retirement plan, and reduce or eliminate debt.
• Visual illustrations to track progress, using graphs, charts, or periodic reports.
• Track and manage bank accounts, credit cards, and investments.

Many programs even allow you to download account information and history straight from that account into the program itself.

Whether setting up a budget with software or by hand, also take into account and plan for the following:

Regular Monthly Expenses, including:

• Basic needs – food, clothing, toiletries, laundry, gas allotment, etc.
• Household expenses – phone/TV/internet, heat/lights, water/garbage
• Insurance – auto, health, life, homeowner’s
• Loan payments – mortgage, auto, student
• Taxes – income, property, sales, vehicle; set aside a small portion of the amount for expenses that are yearly.

Total monthly expenses should not exceed more than 60% of net monthly income. While some payments are fixed and cannot be adjusted, others leave room for adjustments, enabling you to better meet your 60% target.

Successful budgets can have regular monthly expenses at 60% or less, while others can be slightly higher. 60% is not carved in granite. It is just a workable guideline.

In addition to regular monthly expenses, the following items should also be addressed:

• Retirement saving account – there are many options to consider; whether a payroll deduction plan through an employer, or a payroll deduction for a personal IRA account.
• Long term savings – monthly contributions into some kind of savings vehicle. Consider stocks or savings bonds, which are difficult to make spontaneous withdrawals from. Of course, payroll deduction is best. If it comes out of your check before you see it, you are less likely to miss it.
• Short term savings – again, payroll deduction is best. Deposited into a bank or credit union savings account, for use as a “slush fund,” or for emergency or other expenses, (vacations, car repair, unexpected illness, holiday spending, etc.
• Mad money –used for extra purchases or recreational spending during the month, such eating out, movies, a night on the town, etc.

Rule of thumb, up to 10% of your monthly income can go toward each.

Setting up a payroll deduction to automatically deposit funds into the saving plans will help ensure regular monthly contributions are made.

Other Considerations

There are additional considerations for making your budget a successful tool. Again, if you have considerable non-mortgage debt caused by credit card use, it is crucial to stop using them. Even if you have to cut them up!

Debts need to be reduced and eliminated for a healthy budget. In lieu of monthly contributions to a retirement or long term savings plan, that 20% of your monthly income can be used to pay off credit card debt first. Once the debt is paid off, contributions to these savings accounts can commence.

If you are struggling and unable to make adjustments required to adhere to paying regular monthly expenses using no more than 60% of your income, take a closer look at some of your payments.

Chances are that your home mortgage or auto loan payments are too large for your income. If you have children attending a private school, you may want to consider public school, instead. Or, perhaps you are trying to make payments on luxury items such as a boat or RV, and your income just won’t stretch that far.

What about your television cable package; do you really need all those channels? And is there anyway to cut back on extra costs incurred by long-distance telephone calls?

If you have several credit cards you are making payments on, is there anyway to effectively consolidate all expenses onto one card for a lower monthly payment?

Adjust and Reduce

Making prudent decisions about necessary adjustments required to match one’s life style to their income is not always easy. Especially after becoming accustomed to a more extravagant lifestyle. Of course, there are other ways to reduce regular monthly expenses:

• Shop around and find a lower premium for auto insurance, or reduce the coverage.
• Refinance your mortgage for a better rate and lower payment.
• Refinance your auto loan at a better rate and lower payment.
• Lower your phone bill – if you have a lot of long distance charges, consider an unlimited long distance deal at a set monthly charge, or look into getting VoiP Internet telephone service.
• Save and use coupons. Clip them from magazines, newspapers, and use numerous Internet resources for obtaining more coupons.
• When feasible, buy generic or non-name brand goods.
• Drive used cars.
• Buy merchandise from on-line resources such as amazon.com or overstock.com at considerable savings.
• Brown-bag it for lunchtime at work.

Another alternative is to seek ways to increase your monthly income. Whether from additional employment, or another resource such as getting paid for doing short surveys on the internet.

Resources for earning additional income are countless. Find ones best suited to your individual situation.

By discovering what is budgeting, utilizing these steps of commitment, action, and discipline, you will be well on your way to taking control of your finances though the power of a successful budget!