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Budgeting Basics

Budgets are like a New Year’s resolution for personal finance. We all know we should have one and we all know it’s a fairly simple thing to follow—at least in theory.

Like resolutions, we often map out personal budgets with the best of intentions, only to abandon them a couple of weeks later. Just like resolutions, if we design budgets that are too restrictive or too vague, there’s no motivation to follow them.

Whether you’re planning your first budget or re-evaluating your current budget, the ground rules listed below will help guide you in the right direction.

And, it doesn’t matter if you manage your budget on your smartphone or if you prefer good ol’ pen and paper—   these budgeting basics can be applied to every budgeting system.

Budgeting Basic #1:  Budgeting is about confidence, not guilt.
A lot of people avoid creating a budget because they think it will mean giving up things they love and they will have to convert to a super-frugal lifestyle.  Or, they might be scared to discover just how much money they have been wasting.

Budgeting is not meant to shame you into being financially responsible.  It is simply about awareness.  If you fully understand where your money is going each month, you can design a budget that will allow you to truly enjoy your money. 

Will your next shopping spree keep you in credit card debt for another month? 
Is the high price of your monthly rent stressing you out?

Budgets can help you manage your bills and save for future expenses and they are the key to spending your money confidently.

Budgeting Basic #2:  Stop comparing yourself to others.
An effective budget is tailored to your specific combination of wants and needs. Budgeting categories can vary widely depending on where you live, work, how you get around (car, bus, train, or bicycle), what you do for fun and what your long-term personal goals are (what are you saving for). 

Finding a budget that works for you will take trial and error. And it may look very different than the budgets that you see online or in a book. Realize that everyone has different priorities and no two budgets will be the same.

Budgeting Basic #3:  Be real about your income:
A rookie mistake when it comes to budgeting is using your salary (divided by 12 months) or your hourly wage (multiplied by hours worked) as your monthly income.

Instead, take a couple of minutes to calculate your monthly take-home pay.  This is your income after estimated taxes and additional deductions such as healthcare, social security and retirement savings contributions have been deducted. 

All of these deductions will be listed on your paycheck.

Budgeting Basic #4:  Savings should be considered an expense in your budget.
The only way to take savings seriously is to give it the same priority as your living expenses. If you contribute a set amount to your savings every month, your savings will grow so much faster.

By making it a monthly habit, you won't miss that extra money and your savings cushion will begin to grow automatically.

Budgeting Basic #5:  Look to your budget instead of at your balance.
For some, budgeting means checking your account balance before making a purchase. This is an unreliable way of determining what you can actually afford.

Your account balance can't tell you how much money you need to keep in the account for any bills that many hit your account later today or tomorrow or for an unexpected expense that may pop up later in the week.

It's more important to get in the habit of referencing your budget to know what you have allocated to spend for that month. 

Budgeting Basic #6:  Prepare for emergencies.
Emergency expenses have a knack for breaking even the best prepared budgets because they can quickly turn into a huge source of debt.  If you don't have enough cash on hand to take care of them, you may have to use a credit card or take out a loan to cover the expense.

Therefore, emergency funds should be listed as a separate category from your general savings goal on your budget. Like your savings account, you should determine a set amount to be transferred to this account every month.  Over time it will continue to grow and when something big happens and you need the money, you will be glad you have been automatically saving to your emergency savings account. 

To be most effective, you should only access your emergency savings account for large, unexpected situations.  Having this account will help you in tough financial times and save you stress as well as give you peace of mind.

Below is an overview of the highlights of Budgeting Basics: