How to Create a Budget You Can Live With

There are many different ways to create a personal or family budget ranging from simple to complex, from writing your budget down on a pad of paper to using one of many electronic spreadsheets that are available on the Internet at little or no cost.

But a budget, whatever form it takes, will be meaningless if you can’t or won’t live within your means. However, if you are serious, a thoughtfully planned budget will create financial balance between what you earn and what you spend, which is the fundamental purpose of a budget.

“Budgeting is both simple and complex,” states the Intuit Mint.com web site. “It’s only a matter of knowing what you earn, what you owe and where money is spent. What makes it complex is deciding where to cut back and where to divert more money.”

Start by Gathering Information

Mint.com recommends gathering all of your monthly bills and other expenses, such as entertainment and clothing, for a two- to three-month period so you have a more complete understanding of where your money goes. Put that information in one envelope or box. Then, for the same period, keep track of your income – paychecks and other income, perhaps dividends, etc.

Make a detailed list of incoming and outgoing money on a weekly basis and keep a running account of all income and expense items.

With 60-90 days of financial information, you will have a better picture of your financial status on a monthly basis. If the outgoing adds up to more than the incoming, don’t fret; you are not alone. Next, break your expenses into categories – rent or mortgage, utilities, groceries, auto and gas, insurance payments, cable bill, hopefully savings/investing, etc., everything that is a monthly expense. These expenses can add up to 50-60 percent of the budget.

Also, think ahead. Setting aside at least 10 percent of your monthly income for savings or retirement is considered mandatory by personal financial planners

Manage Discretionary Spending

A critical part of this budget list are discretionary items that can account for up to 15 percent of monthly household expenses. These include such things as dining out, entertainment, clothing, charitable donations, travel and accommodations, and organizational memberships such as health clubs.

Discretionary spending can add up fast. A few dollars here for movie tickets and a few more there for dining out, can sometimes total more than any fixed monthly bill that you pay.

A tried and true way to manage discretionary spending is the envelope method. The money you allocate for these expenses goes into a cash envelope each month. By paying with cash, you’re more aware of the money you spend for discretionary items and you are less likely to overspend.

But don’t make your budget overly restrictive or onerous, states financial planner Bob Browder. “The almost sure-fire way to make a budget that fails is to not budget for any fun stuff,” he writes. “You need to budget for clothing, entertainment, going out to dinner, or whatever else it is you love to do! The key is to do it in moderation and to set limits and abide by them.”

Paying Off Debt

For many individuals and families, debt is the real problem. According to thebalance.com, as of December 2016, U.S. consumer debt rose 4.5 percent to $3.76 trillion.

Debt accounts for about 20 percent of monthly household expenses and so reducing debt should be a main goal of any budget. But without enough income to cover all monthly expenses, individual or family debt can quickly mount and credit scores can tumble unless steps are taken to redirect financial resources.

For this reason, cutting discretionary spending might be the only budget category from which money can be diverted towards debt reduction. And then, the only way to actually reduce debt – the only way – is to pay more than the required minimum payment each month. Even if this puts additional strains on your household spending, reducing debt must be part of any meaningful budget.

Using Software Programs

While the pencil and paper method might be easier for many individuals and families, there are several electronic spreadsheet type programs available at little or no cost that can bring a more systematic approach to your budgeting process.  Intuit’s Mint.com offers a highly-rated budgeting program, as do YNAB and mvelopes.com.

Although these resources provide useful online budgeting tools, we signed up for mvelopes.com and found the instructions easy to follow and budgeting methodology uncomplicated and user friendly. This and the other sites give you specific income and expense categories you can use even if you go the pencil and paper route.

These online programs are also perfect for younger, tech-oriented consumers to get onboard with a budget which can serve them well financially now and in the years ahead. Your local credit union is also an excellent resource for financial planning.

“The future can seem far way, especially when you’re a young professional just starting out,” notes John Pettit, Managing Editor for CUInsight.com. “You get your first paycheck and the next thing you know, you’re 30. It’s never too early to start being prepared.”