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Living Within Our Means By Sticking to A Budget

Many of us are learning the hard way about living within our means.  We may have mortgage payments that just adjusted upwards or have lost a job or paying too much in credit cards payments.  We are being pressed financially from paycheck to paycheck.  It is time to stop stressing and get control of our financial situation.  One big way to do this is by developing a family budget and sticking to it.  Budgeting is the foundation of good financial health but there is more to budgeting than just writing or inputting numbers on a piece of paper or in a spreadsheet.

A budget will allow us to gain control over our finances.  It will help us to achieve our financial goals.  The concept of budgeting is relatively easy.  The hard part is sticking to the budget by using self restraint or just saying “no” to more spending.

Step 1: Tracking Our Expenses

Before we can develop a budget we need to understand where our money goes.  This means reviewing a month’s worth of past expenses and income.  We could use a sheet of paper or a spreadsheet (click here for a tracking form).  The important thing is to categorize (i.e. housing and food) and itemize our spending and income.  If Total Income is greater than Total Spending then we are in good shape.  We should make sure that are spending reflects our priorities/goals.  If Total Income is less than Total Spending then we have some work to do.  We have to get our spending in line with our priorities/goals and income.

Step 2: Setting Priorities/Goals

Having a budget is great but if we don’t have priorities/goals (in writing) then the budget will not mean nothing and we are more likely to not stick to it.  Setting priorities or goals can be as easy as “savings for a down payment on home in three years”, “eliminating all credit card debt in two years” or something related to saving for college or retirement.  Just make sure when setting goals or priorities that there is a “deadline” or time frame attached to it and an estimated dollar amount.  Once we have priorities/goals then it is easier to make cuts/adjustments in our spending.  If we want to save for a down payment then we may have to sacrifice something such as cable/satellite T.V., dining out less or coffee/café mocha.  Remember, “Pay Yourself First” if you want to increase your savings and/or investing; this means that we budget and deposit money in the applicable savings/investment account before spending on anything else.

Step 3: Creating Budget Form and Categories/Line Items

Next, we need to create a budget form.  This can be done on lined paper (ledger books are good) or spreadsheet (Click here for a budget form).  We should have columns for “Budget Amount”, “Actual Amount” and “Difference”. 

We should have categories or “line items” for each spending item.  For example, if we write a check or use debit card at the grocery store there should be a category/line item for “Groceries”.  If we have to pay for a cell phone then there should be a category/line item for “Cell phone”.  All spending should be allocated to a category/line item.  The budget form created here contains the most common categories/line items.

Step 4:  Filling in the Budget Form

Next, we should review the work we did in Step 1.  This is when the tough decisions, in terms of aligning our spending with our income and priorities/goals, have to be made.  We have to fill-in the “Budget Amount” column in our budget form.  The “Total Income” for “Budget Amount” in our budget form should equal the “Total Income” for Step 1 (unless we include expected salary raises and/or increases in other income).  The Total Expense “Budget Amount” must be equal to or less than the Total Income “Budget Amount”.  If Total Expense is less than the Total Income then allocate excess amount according to your priorities/goals.  If Total Expense is greater than the Total Income then more expense cuts must be made.

Step 5:  Budget Tracking

This next step is the most overlooked part of the entire budget process.  It is not enough to just fill-in “Budget Amount” and leave it alone.  In order to be effective we must track our spending on at least a monthly basis (after ever pay day is better) and compare it to the “Budget Amount”.  The “Difference” column is the “Budget Amount” minus “Actual Amount”.  The “Difference” column will tell us if adjustments need to be made to our Budget.

Tip:  This all can be done within Quicken.  It is a lot easier to track your expenses and manage your budget with this money management program.