Budgeting isn't something most people get excited about. The word smacks of self-denial and hours spent in front of an Excel spreadsheet trying to trim $1.09 from the electricity bill.
I used to feel that way, too -- until I realized that relying on a simple blueprint for saving and spending is the express route to personal financial security. We can't predict everything that happens in life, but we can ensure that we always have a solid financial cushion (and thus peace of mind to spare).
While you don't have to be a calculus whiz to create a budget, you do need to invest a block of time (an hour per week) to monitor your money and hone new habits. Many budgeting approaches suggest putting cash limits on certain categories or using software programs to make sure that you spend only X on Y. I'm not in favor of those methods. Life is just too unpredictable. My budget relies on a save-to-spend strategy: By working on saving first, you'll live within your means, steer clear of debt, and end up ahead.
My plan aims to hit specific targets, using automatic transfers to keep saving steady. Here's the breakdown:
- 10 percent of your income comes off the top for retirement (if you're at 2 percent, inch it up every few months; you won't miss the cash, and the long-term gains are huge).
- 5 to 10 percent goes for long-term expenses (a baby, a new roof).
- 5 to 10 percent gets put aside for upcoming or unexpected bills (gadget upgrades, a property tax increase).
- 5 percent gets allotted for your own personal spending ("fun" money).
The challenge lies in keeping your monthly expenses at 65 to 75 percent of your income. But remember: You'll eventually spend what you're saving, starting with that 5 percent for lattes, dinners out, and the occasional mani-pedi with your best friend.
Now, to reach these targets, you need to assess your cash flow. Follow these steps to see where you stand and where you can trim back.
1. Tally up your income. Include regular salary, plus approximate bonuses, overtime, investments, and any other regular income. Know the gross amount (pretax) as well as your net income (take-home pay).
2. Figure out what you spend. Note how much you're shelling out in each of three key categories: For monthly outlays that rarely vary (mortgage or rent, insurance, a gym membership, retirement savings), check recent bills and paycheck withholdings. For regular bills that usually fluctuate (groceries, child care, utilities), take the average of two or three months of those bills. To track sporadic or unexpected costs (a friend's wedding, the laptop breaks, you owe money to the IRS), check out at least six bank and credit-card statements. Jot down as many of these expenses as you can, and create a monthly average. (For help, use the online budget worksheet.)
3. Take action. If you've never added up your expenses (or if it's been a while), you may have found the first steps exhausting and depressing if you've realized you can't set aside enough for savings and pay the bills. That's OK; these are target amounts. Just remember, the more you can set aside for upcoming and out-of-the-blue expenses, the more secure you'll feel. That may involve making major adjustments (such as finding a higher-paying job or less pricey housing), a few smaller ones (using the library in place of the bookstore or cooking at home more), or a little of both.
Consider, too, whether the way you allocate your cash matches your priorities. Do you want to spend less on eating out and more on self-care? Do you want to save more for home projects and spend less on clothes? By focusing on what's most important, you'll slowly change how you spend. Stay on track by devoting an hour a week to fine-tuning your budget and building new habits, especially early on. It's a small investment for the big financial (and emotional) returns you'll enjoy now and in the future.
Text by M.P. Dunleavey, author of "Money Can Buy Happiness" and a columnist for MSN Money.