Jun 21st, 2007

Do Budgets Really Work? A Few Tips for Your Budget

By David Weliver

Four out of five personal finance pundits say a budget is the only way to trim spending and save cash. Unfortunately, four out of five “real” people might disagree.

Let’s be honest, do budgets work?

A monthly budget is supposed to accomplish two objectives: It should help us plan our for our monthly expenses based upon how much income we earn, and, at the end of the month, it should give us an idea of how our actual spending patterns compare to our plan.

Sounds easy, right?

Then why do so many people, myself included, have such a hard time making – and sticking – to a budget?

Theoretically, after a few months of predicting to spend just $20 a month on coffee and later realizing we’re actually spending $75 a month on our caffeine fix, we’re supposed to say: “hey, that’s a lot of money I could be saving!” and eliminate – or reduce – the amount we spend on coffee.

But in the real world, it isn’t that easy.

Few of us carry our budgets in our pockets or keep track of every penny we spend. Even if we did, our desires tend to get the best of us. Few of us are motivated solely by numbers; and our near sighted cravings for caffeine or our desire to spend Thursday nights out with friends often beat out the little angel on our shoulders crowing “save the money!”

And then there are unpredictable expenses and fluctuating gas prices. One month your car breaks, costing a few hundred dollars you didn’t plan on. Not to mention that a gallon of gas cost $2.40 a few months ago and is now over $3.00.

I believe budgets can work, with a stipulation: they need to be realistic, and they need to be malleable. Basically, you can’t blindly write down that you’re going to spend half of what you earn and expect to live by the budget by the number month in and month out.

You’ll be doomed to regularly overspend, get frustrated, and give up on the whole thing.

So how do you create a budget that will work?

1. Start with expenses that are really fixed. This includes your rent and car payments. These are expenses that are going to stay the same until you take action to change them.

2. Add in regular but fluctuating expenses. This will include your utility bills and things like groceries and gas. You’ll have to pay these expenses every month, but the amount you spend in each area will vary based upon your usage and market prices.

Note: For maximum effectiveness, take the average monthly amount you spend in each area and then add about 20%. That gives you a budgeted amount that you will be unlikely to utilize, but if you do exceed it, it won’t be by very much.

3. Now add your discretionary expenses. Travel, entertainment, dining out, gifts. Anything you don’t have to buy but like to. Obviously these areas are the easiest to trim on paper, but they can often be the hardest to trim in real life. After all, these are the things that you like to spend money on!

Take that into consideration and if you need to allocate another $100 to a debt payment, don’t just automatically say you’ll spend $100 less on dining out. I would recommend taking a little bit from several areas to come up with that $100.

4. Add a cushion. This is something I didn’t do for a long time, and I suspect many others don’t either. Everybody should have a cushion in their budget of at least 10%. It should not be allocated for anything. Think of it as a short-term emergency fund.

If you don’t end up needing it – great – put it into savings. If you do, it saves you from digging into your long-term savings or credit for help. Of course, 10% of your monthly expenses may not be enough to cover a large car repair or other emergency, but that’s what your long-term emergency fund should be for.

5. Revise your budget monthly. Half of the benefit of budgeting comes from reviewing where your money went and thinking about how you can try to allocate it better. Some revisions will be needed just to keep up with rising costs while others will reflect changes in your life situation or spending habits.

Some other random tips that might help you budget:

Set up multiple bank accounts to track your spending. (See how I do this).

Get help from software like Mvelopes (read my review), Quicken, or Wesabe (I will review this soon).

Go cashless.

No budget is perfect, and only a robot could live by a budget to the penny. But, when done properly, budgets can work to help you spend less and save more. That’s what they’re all about.

Have you found any tips or tricks that help you stick to your budget?

Related Posts

1. Get a Budget
2. Need Help With Your Budget? Try a Weekly Budget
3. Using Multiple Bank Accounts to Control Your Spending
4. Budgeting In Your Twenties
5. Debt Free Step Three: Your Debt Management Plan

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