(This post originally published on December 6 2007)
Every one of you frugal beagles will have a different reaction and idea in your head when I mention the word budget. Some of you may find it an unnecessary restriction in their lives. The only people I can think of who don?EUR(TM)t need a budget are those who:
- are rich enough to get others to manage their money
- have the ability to store it all in their head
- don?EUR(TM)t have many expenses
I think this is really necessary for anybody who is serious about spending frugally and building wealth.
Some of you have had experience with a budget, but you gave up at one point or the other. You could have found it difficult to stick to a budget or got discouraged after a while. I suspect that some of you even stay away from a budget because you know that your spending is beyond your income.
In this article, I will share with you a 7 Step Frugal Beagle plan for creating a budget and sticking with it.
Why is a Budget Important?
A budget is very important because it serves two purposes:
- A guide to let you know how much money you can afford to spend
- A measure to let you know if you are overspending
A budget gives you the power of awareness over your finances. You will be able to know where your money is going, and where you stand financially.
What Should Be In a Budget?
What do you include in your budget? Your budget should include all your major income sources and expenses. This means that you should be budgeting for your expenses such as rentals, loan payments, utility bills and food.
Most people would follow a monthly budget, but it is equally all right if you want to follow a weekly budget instead. I wouldn?EUR(TM)t advice any period longer than a month.
Frugal beagle puppies (rookies) who are doing this for the first time should aim to keep things simple. Round all expenses to the nearest ringgit. Don?EUR(TM)t be too pressured to track every sen you spend.
The 7 Steps
1. Where?EUR(TM)s Your Money Coming From?
First of all you need to know where your money is coming from.
For most people this will be their monthly salary. For others it could be income from commissions, business or allowance from parents.
You should not include uncertain income to your budget such as dividends, bonuses or gifts. Your budget will be in trouble if you don’t get the money you expected, and you end up overspending for the month.
2. How Have You Been Spending?
After you have determined where your money comes from each month, it is time to analyze where you have been spending money.
Gather your bills, credit card statements and receipts to see what your expenses are. It would be best if you can find one month of expenses.
The purpose for doing this is to get an idea of how you have actually been spending.
If you don?EUR(TM)t have anything to document how you spent your money, then you will have to think and remember.
Don’t do any calculations at this stage.
3. Assign Expenses into Categories
After you know the kinds of things you?EUR(TM)re spending money on, you can group related expenses together into categories.
If you?EUR(TM)re doing this for the first time, resist the temptation of creating too many categories. Keep things simple.
At this stage you might be wondering how you are going to keep all this information. I suggest you find some free software for your computer or Pocket PC. You can also use web based software. I like Expensr Money Strands. An alternative is to keep a simple spreadsheet.
4. Set Limits and Goals
The next step is to set a limit for each spending category. Use the information from steps 1 and 2 to write down how much you are currently spending for each category.
After you have done this, you should have a total income and total expenses figure. You can immediately see if you are over spending.
The next step (and this is important) is to set a budget goal for your spending categories. For each category, set a goal that is
- Realistic enough so you won?EUR(TM)t discourage yourself. You may want to start small and set more challenging goals later.
- Challenging enough so you make some progress and force yourself to spend carefully and creatively.
For example, if you have been spending RM500 on food, set a goal of spending RM450 on food next month.
Don’t forget to create a category for savings.
5. The Cushion Category
You may want to add a category to your budget to cater for emergencies and unexpected expenses.
I call this my cushion category and I use this money to handle unexpected car repairs or buying last minute gifts.
The amount allocated to this category should be minimal, and should not be used if possible. If you find yourself using up your cushion category every month then you need to re-analyze your budget.
I put unused funds from my cushion category into savings.
6. Track Your Expenses
After you have finalized your budget, it?EUR(TM)s time to start using it!
Make it a point to update your expenses at regular intervals. You will find it easier if you save receipts. Don?EUR(TM)t wait too long or you will forget about the transaction. Make it a habit!
I find that I become very conscious about each ringgit I am spending when I track my expenses. This has helped me to avoid impulse spending.
As you update your expenses, take a glance at your budget to see how things are going. If you are over spending, cut down on another category to make up for it.
You don?EUR(TM)t have to balance every single cent, so don?EUR(TM)t get too stressed if you lose track of a few ringgit. It?EUR(TM)s also okay if you go over your budget. Just try again next month.
Periodically spend some time to look at your budget and review your goals. As time goes on your needs will change and so will your budget. Keep it updated with your latest expense categories.
Tweak your goals to make them more challenging or to give yourself more ?EUR~breathing room?EUR(TM) to spend.
These 7 steps should be enough to get you started with your budget. It is simple enough that you could even use it when you teach your kids about budgeting.
My final word of advice is to get started right now. Don’t wait until the end of this month or the start of next month.
Have fun with your Frugal Beagle Budget!