The idea behind a budget is incredibly sound – you plan out where your money is going and you make sure to set money aside for savings. Pretty simple right? It gives you a clear sense of where your finances are and what you have to spend; for example if you needed to pay your water bill this month then you wouldn’t run out and buy an iPad if you didn’t have extra money. The budgeting process is pretty straightforward you match all your expenses against your incomes – in essence it really is that simple but the reality is that people are scared of the idea, they are happy to live in ignorance while spending themselves into debt. With budgeting you gain some measure of control even if you have to take best guesses when it comes to some items because they’re a bit variable (say groceries).
After a month or two you can start to see where your money is really going and how to start making positive changes in your budget and your lifestyle. Unfortunately you have to keep very close tabs on your spending to really make sure that you know where your money is going. Personally when I’m evaluating my budget or trying to get a clear understanding of where my money is going I use a budget but I match that up with a detailed accounting of all my spending and I really do mean all of it (down to the pack of gum and can of soda). After about a month or two you start to see a picture forming of where you spend your money versus where you think you spend it (your budget). You need to make sure that your actual spending isn’t causing problems in your budget. One of the biggest shocks I’ve gotten as a result of this site cam from this exercise. I found out just how much money I was spending and where my money was going and it floored me. I think a great many people would be surprised if they did this exercise.
Overall budgeting isn’t too hard but you do have to keep it up for it to be really useful. If you budget for a month or two then stop then there’s really no point to it. By having a budget and tracking where your money is going you can see the gaps and adjust either your budget or your spending.
The biggest problems I have with budgets is that the budget portion by itself is pretty straightforward, it’s the expense tracking that can be time consuming and lets be honest tedious and boring. After a month or two I tend to stop being as meticulous about my expense tracking – the good thing here is that by this point I’ll already have an understanding of where I’m really spending my money and I’ve made a few corrections. While my approach isn’t perfect a couple quick resets a year and I’m able to keep myself mostly on track. If you’re extremely meticulous and diligent in keeping this going then it can make a huge difference over a year.
Another thing I’ve started to use is Google docs for tracking my expenses – its got pretty much the same power as excel or quicken but you can access it from pretty much anywhere in the world where you’ve got an internet connection. This has made the tedious aspect of tracking my daily spending a bit easier.
If you are brutally honest with tracking your spending you’ll see that there are many holes there, even the daily cup of coffee can add up to a lot of money which you could use to pay down your debt or start a savings account. By budgeting you can start working towards your financial goals rather than simply letting the monthly bills and expenses drive your life (it can be very easy to fall into this trap)
I’ve been pretty good about tracking my budget and expenses over the past few months and I’ll share my templates and give more details on my budgeting at the beginning of the month (I want to take another look at everything to make sure it all makes sense).