You know the drill when you set up a budget. You write down how much income you have and then you decide how it gets split up. You can use various techniques like a zero based budget, an envelope system, or you go through each budget item step by step tweaking your projected expenses to make them fit your income. At the end of this exercise you know how much of your income is spent on necessary expenses like housing and transportation, how much is spent on less necessary expenses like entertainment and traveling, and how much you plan to put into savings.
Photo by Tiago Ribeiro via Flickr
It may seem like this is an involved process, but deciding how to spend the money is really the easy part. Ok, it does take some time to split up your income so that you have a realistic budget, but a budget tells you only how you think you should spend your money. It does not tell you how you are actually spending your money.
The hard part comes after you have set up your budget. When you have decided how you should spend your money, you must make sure that you actually spend your money according to your plans. How do you do that?
Personally, I think this is the hardest part of all. Why? It’s best if you write down every dollar you spend so that you know what you really spend it on. It is not good if too many dollars end up in the category “various” or “miscellaneous”. So you have to be diligent, and really account for every dollar to make this work. If you are married, you also need a spouse who writes down every dollar spent. In other words, you need discipline to really keep track of your spending. To make things a little easier for you, you can use an internet-based free budget planner like budgetpulse.com.
Make sure that you have enough dollars to spend in each category and overall to last you for the month. Cut back if you are spending your money too quickly and you might relax a little if you are starting out a little too tight with your money.
At the end of the month, add up your expenses, compare your expenses with your budget in each category, and compare your overall spending with your income and savings plans. This may sound complicated, but it just takes a bit of time to sit down and check out the results of your hard work over the last month.
When you know how you actually spend your money, you can then decide whether you need to change your budget so that your plans match your actual spending better. Of course, you can also decide that you have to adjust your spending so that your expenses fit your plans.
After doing all this, you will have some valuable information that helps you plan your expenses better. You know how you actually spend your money. Be aware that you only gain that knowledge if you do the hard part of living by a budget, that is, if you record your expenses dollar for dollar.
How far have you come with budgeting? How well have you done recording your expenses?