Understanding Your Budget and Making it Work for Your Lifestyle

Just like with any vice, there is never a bad time to create a budget. Whether you are single, a couple who is just moving in together, or a family of five, everyone needs a budget. By understanding your budget, you can best utilize your finances for the present, as well as the future. Do you know how to make it work?

Categorize Your Budget's Cash Flow

Every dollar that you pay out, as well as any income, should be labeled. Every budget should have multiple categories, including: income, housing, utilities, debt/loans, transportation, health, and entertainment. Within those categories, list each type of resource, as shown below.

Income
*Income
*Extra Income

Transportation
*Gas
*Auto Loan(s)
*Car Insurance

Utilities
*Water
*Electric
*Trash

Debt/Loans
*Student Loan(s)
*Credit Cards

Entertainment
*Dining
*Shopping
*Music/Movies/Etc.

Household
*Mortgage/Rent
*Homeowner's Insurance
*Groceries

It takes a little work to create a budget, but once you start it gets easier. First, generate a spreadsheet or draw a chart on a piece of paper. Create a column for each category and list each resource on a separate row.

The next two columns should hold an "anticipated/estimated/projected" cost for each month and the "actual" cost each month. This will allow you to see how much of your income you have allocated and how much you actually spend.

The first month will always be the hardest. Budgeting is a reality check that not many people really want to see on paper. There is no way around it. The good news is that there are a few things you can do to make it easier, especially if you are saving up for a house, car, or vacation, or if you are simply wanting to pay off some debt.

Work in Cash

Plastic, either in the form of a credit card or a check/debit card, can hurt your budget. No one ever adds two or three dollars here or there. Still, those little purchases start to add up, particularly if you do not have much money reserved for that category.

The best thing to do, until you learn to control your budget, is to work in cash as much as possible. Once the cash is gone for that category, then you are done until the next pay period. In general, people tend to be more frugal with their money when they can actually watch it disappear.

Remember, you can only work with what income you have. Using credit to gain things you cannot afford is never a good idea. What if you lose your income? How will your budget work then?

Budget Your Ability to Pay Off Your Debt

If you have any outstanding debt, such as credit cards or loans, use your extra money to help pay off that debt (or at least pay it down). The extra money that you gain from not being in debt, as well as not paying interest rates, can go toward whatever you want. But, you probably want to put some of it away in savings!

Depending on your size of debt, you may not be able to pay it off right away. That is okay! Stick with it and you will see that amount diminish. As it does, more of your money will go to your principle and not to your interest and finance charges.

Sticking to Your Budget Will Always Pay

Managing a budget is not difficult, but it does require some dedication. You must be willing to label, and log, everything that you spend. You must take the time to pre-determine how much you spend for each category, as well as determine if you are spending (or allocating) too much of your income on one specific category. Even your housing should not total more than 30% of your income.

As you distribute your income, pay out to mandatory categories, such as debt, housing, and transportation first. Next, pay out to mandatory utilities like water, electric, and trash before determining your allowance for utilities like cable and your entertainment needs.

As your income or needs change, so should your budget. If you try to make a budget for a single person work three years later for a husband, wife, and baby on the way, chances are it will not be accurate. Also, as you pay off debt, take the time to redistribute the additional money.

After only a few short months you will begin to notice a difference in your budget and your way of living. Best of all, you will notice a boost to your bank account and less stress when you sit down to pay bills at the beginning or end of each month. All it takes is a little effort and you can make any budget work.