The A-B-C’s of Budgeting
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One of the keys to taking control of your personal finances is to set up an effective budget. An effective budget helps you to set goals, control your spending, and monitor your progress. Sometimes, though, setting up a budget can be overwhelming. That is why I have devised my personal A-B-C’s of Budgeting: Analyze your Spending, Set Boundaries, and Carry it Out. This article will take a closer look at how to set up a budget using the A-B-C’s. For more information about effective budgeting and for a link to my own budgeting spreadsheet, check out my Budgeting page.
Analyze Your Spending. The first step to setting up an effective budget is to analyze your spending. Without doing this, you will have no idea how high or low to set your boundaries in the next step. To track your spending, I recommend using a money management software such as Free Quicken Online. Alternatively, you can use your own spreadsheet or even a spiral notebook to track your spending. The important thing is that you enter in or write down EVERY SINGLE TRANSACTION you make. This includes transactions made by check, debit or credit card, cash, etc. You should do this for 1-3 months before setting up your official budget.
Set Boundaries. Once you have analyzed your spending, you are ready to set your spending boundaries. Divide all of your expenses into a list of categories. Then, set a spending boundary, or limit, for each category. For example, if one of your categories is “Groceries”, you might decide to set a boundary of $200/month. Use your spending analysis to determine your categories. Make sure your boundaries are achievable, but also make sure that your boundaries require discipline to achieve. Boundaries that are too low are unrealistic and end up discouraging the person who set the budget. However, boundaries that are too high encourage over-spending. Remember, a budget should focus on your NEEDS, not your WANTS.
Carry it out. Now that you have set up your budget, you need to work hard to carry it out. A budget only works if you are willing to follow it. Some months, it might be difficult to stay within your boundaries. You will need a great deal of self-discipline to get through these months. If you do slip one month, don’t panic! You can try again next month.
Once you have finished these three steps, start over! Every month, analyze your spending. Determine whether or not you were able to stay within your boundaries. Then, adjust your boundaries as necessary. If you find that you are consistently going over a particular boundary, you may need to adjust it to a higher amount. However, if you find that you are consistently far under your boundary, you may need to adjust it to a lower amount. Then, once you have adjusted your boundaries, make sure to carry your budget out. With time, you will find the perfect budget for you!
Do you have any other budgeting tips? Make sure you share them with us!
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Great post on budgeting, all the three steps are the perfect one.