How to Manage Your Budget with Rising Costs

In today's economic environment, many people are asking themselves how they will make their dollars go further. This article gives step-by-step instructions on how to manage your budget painlessly with today's rising costs of fuel, food and general living costs.

Difficulty: Moderately Easy

Instructions

Things You'll Need:

• Previous 2 months' bank statement
• Spreadsheet software (ex. Excel)

1. Analyze your spending for the past two months.
   1. Look at your bank account to see exactly where you are spending your money. Categorize your spending accordingly, (ex. utilities, mortgage/rent, taxes, credit card and loan payments, groceries, medical bills, memberships, entertainment, subscriptions, insurance). Be sure to include the small common items, as they can quickly add up: candy bars, snacks you pick up while driving, gifts, even ATM withdrawals.
   2. Use the information you gain here as a guide to see what you are doing with your money. Do not leave anything out or you will have an inaccurate picture of your income to expense ratio, which can lead to problems with your budget down the road.
   3. Be sure to analyze your credit card spending. You are probably charging a lot of unnecessary items. Need and want are two different things. Looking at your credit card statements helps you get a more honest assessment of your monthly expenses.

2. Separate essential from nonessential.
   1. Look closely at your expenses and separate essential from nonessential expenses. For instance, utilities, taxes, credit card and loan payments, medical bills, insurance, emergency savings account and groceries are all essential items. Anything that you absolutely must pay out on a monthly basis is considered to be essential. These items go into the "Essential" section, with a subtotal.
   2. Nonessential bills include subscriptions (magazines and newspapers), memberships, entertainment, dining out (including stopping for morning coffee), nonwork trips, gift purchases, etc. Virtually everything you spend your money on that is not absolutely necessary to your household and life is nonessential. These are the "wants" not "needs." This goes into the "Nonessential" section, with a subtotal.

3. Begin the cutting. Operating in your Nonessential section, begin an examination of all areas that you can live without. Start making tough decisions here about you and your family's spending habits. Examples of things you can cut: dining out, subscriptions, coffee shop coffee, any form of entertainment that costs money, trips out of town, clothing, jewelry, accessories, golfing.
   Two things determine how much and where you cut:
   1) How tight is your income to expense? If you have zero or nearly zero money left over each payday, you need to make a lot of hard decisions. Decide what's most important.
   2) What are the least important areas where you can make cuts in your spending?
   Use your "needs" versus "wants" guideline to help make the decisions. Do you really need to play 36 holes of golf a week, or do you want to? Do you need a twelfth pair of black shoes or do you want them?
   Using the information you've agreed upon in this section helps you write a budget.

4. Develop a realistic budget.
   1. Transfer your essential and nonessential expenditures to the budget.
   2. For items that are necessary but vary in amount, such as groceries, use your analysis to determine a realistic amount. Knowing how much you've spent in the past two months will help you determine how much you need to place in the budget. If these items seem high or vary widely, consider where you might be overspending and adjust accordingly. For example, If you buy lots of soda, commit to buying the brand that is on sale.
   3. Be sure to include once or twice a year expenses, like auto registration and property taxes. If you must save for these things, be sure to include the appropriate amount in your Essentials section--enough of a monthly savings that you'll have the necessary amount when it comes up. Don't forget to allow for months that include birthdays and gift-purchasing holidays.
   4. Write down your household net (take home) pay.

5. Monitor your budget: Your budget shows how much room you have for movement each month, where you need to cut and what you need to watch. Use your budget to make sure you are spending within your means and according to your budget.
   1. Post the budget near your desk, and monitor your spending at least once a week to be sure you are staying in line with your written budget. Do this even if you are a computer person. Having it in front of your face daily makes a big difference. Pick a day each week where you will sit down with the family and look at what you've spent in the last week (cash included) and under which category it would be listed.
   2. Do not skip this monitoring step. It helps you stay in tune with your spending, your budget and what you need to adjust before things get out of hand.
   3. If you are going to use a cash system instead of debit and/or charge cards, you'll need to track where you are spending your cash. The easiest way to do this is to have everyone save their receipts for everything (yes, candy bars too) they buy.
   4. Make adjustments as necessary. If you find that you've overspent your entertainment budget by the third week, but you are coming up on your night out, have the discipline to cut that expense rather than going over budget.
   5. Do an end-of-month reconciliation. Sit down and scrutinize your spending habits for the past month. Look at your failures and your successes and readjust as necessary.

Tips & Warnings

• On some, items, like memberships, you'll need to make tough decisions. For instance, if a membership in a civic club means paying dues "and" eating out weekly, that's an expense cutting deep into your pocket every month. On the other hand, if it's a Girl Scout or Boy Scout membership, you may want to consider continuing that for your child and giving up something of yours instead. Look for free or low-cost forms of entertainment. Instead of visiting the movie theater every Friday night, save that expense for a special once-a-month date, and rent movies the other 3 Fridays. While you do have to eat lunch, you do not have to eat lunch in a restaurant every day. Start using up those leftovers and taking your lunch to work. If you can afford it, treat yourself to one lunch out per week (or as budget allows). Coffee adds up. If you spend $2 a day on coffee, that adds up to $10 a week, or $520 a year. Invest in a "go-cup" and take your coffee from home. Pre-packaged foods, such as instant rice, pasta, and potatoes dishes, instant desserts, and frozen meals are a huge expense. Cut your grocery bill by cutting out those items and cooking from scratch more often. Credit card charges add up quickly. If you are commited to reducing your monthly nonessential spending, you must think seriously about your credit cards. By going with a cash system, you force yourself to become more dedicated to buying only what you truly need. Remember that those things you are charging ultimately have to be paid for, and that means higher monthly bills. Consider canceling all except the card with the best rate and terms. Take that one out of your wallet and place it in a safe place for use only in a true emergency. Stop using your debit card and checks to pay for everything. It is harder to track money spent when you aren't actually spending cash. Pay your bills in your normal way, and then get cash for everything else (groceries and other expenses). When you run out of cash, your spending days are done until the next check comes in. If you are running out of cash, it's a good indicator you are spending inappropriately. A savings account is essential. Pay yourself first, as the saying goes. Include this in your budget.
• To avoid arguments or hard feelings, be sure that the whole family is in on the budget-building process. Ask them for input on things that may affect them. This gives them "buy-in", makes sure everyone is on board and may prevent arguments down the road.

Resources

• Free Family Budget Planner
• Free Microsoft Office Budget Planner
• I Need a Budget - In Pounds, but it works great anyway and gives instant results!