For many, the key to making ends meet is keeping better track of their spending. But creating--and, more importantly, sticking to--a spending budget is no easy task. The best-laid plans are often ruined by impetuous spending and undisciplined decisions.
There are steps consumers can take to improve the prospect of a budget's success. Following these guidelines might make the process easier, but in the end, success is a matter of pocketbook self-control and fiscal constraint.
Evaluating spending and setting priorities. Jeremy Vohwinkle, a chartered retirement planning counselor and a writer for the Gen X finance blog, says the first step in creating a budget is to determine your outflows.
"The best place to start is to take inventory of where your money goes," Vohwinkle says. "A lot of people have a rough idea of where they spend, but take a month or two to see where the money's going and you'll be really shocked. You find places that you can cut back."
The next step is creating spending priorities, keeping in mind where money is currently being spent. For most people, first on the list is a housing payment, be it a mortgage or rent. Then come the basics: food, utilities, medical expenses, car payments, and insurance fees.
Another area to target early is high-interest credit card debt. According to Vohwinkle, this debt can end up costing much more than the initial purchase. "If the interest rate is high, the quicker you can get it taken care of, the more you can save in the future," he says.
Next, it's necessary to identify priorities like entertainment, dining out, or sports clubs. None of these are absolutely necessary to live, but they are a luxury that almost everyone enjoys.
It's also important to establish goals outside these priorities. Many people are saving for long-term items, like a car or vacation, or wish to put aside a specific amount of money every month. These goals should be set before budgeting begins:
Creating a budget. Once priorities and goals are established, an actual budget can be made. First, establish how much money comes in each month. Once this is done, money can be allocated for each expense.
Of course, housing, utility, food, and medical costs are not negotiable. Each of these expenses is static and not likely to change radically from month to month.
The key to budget allocation is being realistic. Spending habits are hard to break. If you're spending $500 per month dining out, then creating a restaurant budget of $50 per month is likely not going to happen.
"The easiest thing to do is start incrementally. If you're used to going out and spending $500 per month, you don't want to cut that in half because you'll feel like you're depriving yourself," Vohwinkle says. "Even if it's just shaving $100 per month, it's a good start. As you adjust, slowly bump that up."
In order to track spending once the budget is set, Vohwinkle recommends a program like Mint.com, a free application that allows users to upload their account information and get immediate insight into where their money is going.
"With tech these days, it's so easy to have your budget plugged into a program," Vohwinkle says. "You're reminding yourself every day that you're spending too much or if you have some wiggle room."
A painful process. One of the primary reasons many people don't stick to a budget is that they force difficult changes in their life. They also force people to confront some unpleasant realities about where their money is going. It's often easier to abandon the budget than continue to be disciplined.
In this way, budgets are like diets: easy to start, but difficult to finish. Vohwinkle said the best way to improve your chances of success is to make the process less painful.
"Like a diet, you have to get out of the mindset that you're depriving yourself," he says. "You have a certain amount of money each month. It doesn't matter where you're spending it, you just have to spend under that amount. So you can spend more in areas that make you happy, and spend less in areas that don't."
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