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Making Sense of Your Dollars and Cents with Budgeting

With the recent economic downturn, many individuals are paying greater attention to their bottom line. Maybe you've experienced a life change and you've had to tighten your purse strings, or you need to save for a specific goal, or you simply want to know where your money goes each month—creating a budget can shed light on your financial situation.

How to create a budget
  1. Determine how you will track your expenses. You can use a software program, a worksheet, a spreadsheet, or even a notebook. Your budget format will vary depending on how detailed you choose to be. The following example may be a good start:

    DateExpense NameExpense AmountEssential? (Y/N)
    2/1/2009Coffee and muffin$3.19 
    2/1/2009Lunch out$12.50 
    2/2/2009Car payment$419.35 
    2/2/2009Insurance premium$287.32 
    2/2/2009Movie tickets and treat$20.25 

  2. Understand essential vs. nonessential spending. The example above allows you to mark an expense as essential or nonessential, which makes it easier to analyze your spending. An essential expense is a must-have, as opposed to a good-to-have.

    Essential items include:
    • Mortgage or lease payments
    • Car payments
    • Insurance premiums
    • Utilities
    • Groceries

    Nonessentials include:
    • Meals out at restaurants
    • Entertainment expenses
    • A new designer handbag
    • Golf clubs

    Whether an expense is essential or nonessential often depends on the individual. If you live in an urban area, for example, where you can access all you need via public transportation or on foot, a car payment may not be essential.

    This doesn't mean that you canít spend money on things you love; the goal is to help you take an objective view of which expenses are necessary and which ones could be considered luxuries. And it can help when you start to look for areas where you can potentially save money and allocate funds toward other goals.

  3. Track your expenses for a month. This will give you a true picture of your spending and all of your fixed expenses. As an alternative, log your monthly fixed expenses and then keep a two-week inventory of other variables.

  4. Everything counts. Don't forget about the quarters you put in the parking meter, or the soda you got from the vending machine. Also, if there are quarterly expenses that you won't capture in your tracking period, be sure to account for them on a prorated basis (e.g., a $45 satellite radio subscription would be $15 in your monthly budget).

  5. Analyze. Once you've logged your expenses, categorize items as essential and nonessential. Still coming up short for a specific goal? Try to cut down on some of those items you deem essentials. Is your morning store-bought coffee on your personal essentials list? Consider making coffee at home. Same goes for dining out—can you eat one, two, or three more meals at home each month?

  6. Don't cut items that impact your future. Trying to decide between splurging on that dream vacation and contributing to a retirement account? You may tell yourself that you'll make a larger contribution down the road when you have more money, but consider the impact on your future and the future of your loved ones. Maybe it makes more sense to cut out the nonessential expense, rather than sacrifice your long-term financial health.
Benefits of budgeting
  • Stress relief. You're less likely to toss and turn at night when you know exactly what you spend—and that you have enough to meet your essentials.

  • More cash to put toward other goals. By analyzing your spending habits, you may find additional cash to put toward other goals, like a vacation or an increase in your savings.

  • More financially savvy kids. One of the greatest gifts you can give a child is a sense of financial responsibility. It may be difficult to refuse a child's request for a new pair of sneakers or an iPhone, but showing them that you track spending so you can ensure that their needs are addressed through a solid plan can teach life lessons.
It's hard to say what personal and financial benefits you'll derive from budgeting, but it is definitely worth it to find out. If your budget reveals that you need extra assistance in saving toward goals, or inspires you to consider your overall financial plan, contact a financial professional.

© 2009 Commonwealth Financial Network