While many financial experts recommend making a budget, the fact is that a budget is not a one-size-fits-all phenomenon. Luckily, there are many options for creating a budget, affording you the opportunity to set small goals on the way to making life’s bigger goals. Choose the type of budget that suits your lifestyle, and you have a far greater chance of being successful in following it.
Monthly Expense Sheet
The most traditional style of budget is one in which you track your expenses for a couple months and then use the figures to set a budget. This style of budget is more effective when you remember to create monthly allotments for irregular or annual expenses such as property taxes, car repair, home repair and gifts.
Many people prefer the high-tech version of the old school expense sheet, entering figures on a spreadsheet that delineate income and expenses. A spreadsheet makes it easier to keep track of the short-term savings you accrue to cover irregular expenses.
Pay Yourself First
David Bach and other financial authors are fans of this method of budgeting that lays down one key ground rule: as soon as you get paid, transfer a percentage of your pay into a savings account. The remaining money is left for you to spend according to whatever budget you determine useful. The savings account should have a portion that is untouchable.
Another way people create a budget is by withdrawing a fixed amount of cash once a week. They use cash to cover all incidental expenses outside of monthly bills. This budget works best for someone who can control spontaneous purchases.
Automatic Savings Plan
In the age of Internet banking, it is a snap to create an automatic savings plan that incurs no fees. In this budget model, you create separate accounts with different savings goals. One may cover long-term needs such as retirement or college tuition and another may be intended for shorter-term goals, such as holiday gifts.
For those who prefer an interactive approach, using an online budget calculator can be effective. The Mapping Your Future website (see Resources) has a simple page listing categories for you to fill out with your expenses. After entering the various figures, you receive a total of monthly and annual discretionary income.
Keep the Change
Some people have their monthly expenses under control but desire a simple method for saving for things like a digital camera or a weekend trip. One easy and fun method is to keep a coffee can or jar in the refrigerator. Every time you purchase something, use only bills to pay for it. Transfer the change to your stash of cool cash. Raid the change only when you have accrued enough money to pay for your goal item.
Fixing a Broken Budget
The Kiplinger financial website (see Resources) has a helpful worksheet for figuring out where your budget has sprung a leak. The worksheet contains typical categories for budgeting, but then provides two columns, one for projected expenses and one for actual expenses. By listing both of these figures, people can see where they overspend and underspend in relationship to their intended budget.
In this hardcore budgeting technique, you (and a partner, if you share income and expenses) determine all of your income and all of your expenditures and create a budget that tracks every last dollar you will spend so that you have zero dollars left. The goal with this strategy is that you will include line items such as paying down debt, saving for retirement and saving for other long-term goals.
This type of budget works best for people who need to figure out where they are overspending. Rather than work with actual numbers, which fluctuate from month to month, this plan focuses on recommended percentages. For example, if you find yourself spending 50 percent of your disposable income on food, you know you need to reevaluate your restaurant habit. Some percentages may not apply for everyone or for every situation. In general, aim to spend a maximum of 35 percent of your income on housing, 10 to 15 percent on food, 5 to 10 percent on utilities, 10 to 15 percent on transportation, 5 to 10 percent on medical expenses, 10 percent on paying down debt, 10 percent on savings (to be increased when possible), and 5 to 10 percent on miscellaneous expenses.