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Wednesday, April 13, 2005

Is budgeting for the birds?

Do I have to budget? I think so. A common theme for many in financial distress centers on "I make a good salary, but my money is all gone before the end of the month and I don't know where." We know that to get ahead we have to pay ourselves first, and we can't do that if we don't know how much we have. Track where everything goes for a month or two. If you've been using credit cards for everything in the past this is easy, just check your credit statements and you'll see where the money went. Just because you spent $600 on groceries last month and $200 at convenience store doesn't mean you you need to spend that much each month. It should instead be a wakeup call. Now you can decide where that money could have been better spent. So write down all of your must have payments like rent, etc, and then with the remainder make new must haves- extra debt payments, your IRA, etc. Then you will see what you have leftover for fun, eating out...

Budgeting may not be what you think. I admire people with formal budgets. They use software such as Quicken or Money and constantly update their financial status, sometimes even daily. They download bank and bill statements and they know to the penny how much they spend on food, toiletries, gas, and where they spend it. I am an 'informal' budgeter. I make the exact same amount in payroll every month, and my bills fluctuate very little, so it is not too difficult to apportion out my paycheck on paper, before it comes. I use a simple chart in excel. I also list all my assets, amounts owed, monthly payments, and interest rates on credit cards and accounts. This way I can see my current assets and watch my debt colum dwindle. I don't use any complicated formulas. I usually write all the amounts down in my checkbook as soon as I get paid for my 'needs' and my goals. What I leave in my checkbook postbills and payments is for groceries, gifts, laundry, and fun.

A budget doesn't have to be a formal, complicated spreadsheet or computer software. One of the easiest ways to budget is the envelope system. This entails putting cash in envelopes for specific costs or for specific weeks. For instance, your envelopes may be week 1, week 2, week 3, week 4, and be used for gas, eating out, fun etc. Or you may have 1 for groceries, 1 for fun, 1 for gas-- you get the picture. A lot of people seem to like this system.

Some people seem to have a hard time defining their wants vs. needs. You need a roof over your head, food, insurance- incl. medical.

You may want cable, cell phone, nicer clothing, car, eating out.

Sometimes a want for one is a need for another. If public transport or carpooling is available, you don't need a car, but if it is not, you probably do need one to get to work, the grocery store etc. You need a phone, but you don't need a cell phone and a line line or all the other 'extras' that can with with a phone.

Knowing where my money goes, and deciding where my money goes, makes me feel like I am in control of my money.

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