How to Live on a Budget

The mechanics of living on a budget are not difficult or complicated: Budget your spending to less than your income, and spend only what you have budgeted. The hard part of living on a budget is usually just having the will and determination to stick to it. In the immortal words of Mr. Micawber in "David Copperfield": “Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds aught and six, result misery.” To achieve happiness and avoid misery, it is worth the effort to find ways to live on a budget.

Instructions

1. Create a list of your monthly expenses and compare it to your income for the same time period. You'll need to adjust your budget if you have more expenses allocated than funds and you'll change the budget a little each month to reflect current needs.

2. Make sure your budget has a “rainy day fund.” If you make no provision for unexpected emergencies, you will go off-budget every time the transmission breaks down or your kids break your picture window. A good rule of thumb is to try to build a rainy day fund that is equal to a month’s expenses. You should work to build up a fund that includes the deductibles for all your various insurances (property, vehicle and health).

3. Make sure your budget has some “fun” or entertainment money. The “tighter” your budget, the more important it is to put aside something for enjoyment. And you can truly enjoy this money--no guilt, it’s in the budget.

4. Make sure your budget reflects your passions and beliefs. Don’t try cutting out a gym membership if your morning swim keeps you sane and healthy.

5. Review your personal, professional and financial goals on a regular basis and bring your budget into line with your goals. When temptation to blow the budget strikes, remind yourself of what the budget is making possible: a vacation, graduate school, early retirement or whatever.

6. Reward yourself for staying on budget with low-cost or free “treats,” such as a bubble bath or an afternoon of fishing. Also, make sure your budget has some mad money that you don’t have to account for after it's allocated. When the urge to spend strikes you, you can indulge, up to your budgeted limit.

7. Consider ways to earn more money, if your budget seems tight. Earning more is often less painful than the lifestyle changes of living on less. Explore the possibilities of working a little overtime, or turning a hobby into a side income.

Tips & Warnings

• Make sure your budget includes sinking funds to save for repairs, maintenance and replacement of vehicles and expensive items.

• Do not be discouraged if you have to tap into the rainy day fund for emergencies. That is what the fund is for.

• Avoid credit card debts. You will be paying for things bought on credit long after the enjoyment is over, and pay far more in the long run due to interest charges.

Resources

• Zopa social lending
• Frugal Homesteading