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Budgeting for the Future
Does the word budgets send chills up your spine? I know it did for me for many years, but I've since had a change of heart. Now I realize that budgets allow you to be organized and have some control over what you spend. They help you to decide how to spend your money, plan for your future, pay off existing debt, and save a few pennies each month by reducing wasteful and impulsive purchases.
Categorize four expenses
When you begin setting up a monthly budget, start with big categories before breaking your budget down into smaller expense categories. A good list of basic budget categories to begin with includes.
Housing: mortgage/rent, repairs, property taxes, cleaning supplies, homeowner's renters insurance, utilities, furnishings, décor
Food: groceries, meals out, pizza delivery, snacks and beverages at work
Transportation: car payments, insurance, gas, oil, parking, repairs/maintenance, public transportation fees
Medical: insurance, out-of-pocket expenses such as deductibles and non-insurance covered medical services, pharmacy, eye care, dental
Clothing: new purchases, dry cleaning, repair
Personal: cosmetics, haircuts, cleansers
Insurance: life insurance and any other insurance not covered under home, transportation, or medical expenses
Education: tuition, dues/fees, school pictures, yearbooks,
school supplies, books
Credit accounts: major credit cards, department store cards, lines of credit through your bank or other lender, any other outstanding debt
Gifts: holidays, birthdays, graduations, weddings, showers
Recreation: vacations, movies, books, magazines, newspapers, cable TM restaurants, sporting events, sports equipment
Savings: long-term and short-term goals, as well as retirement
Donations: charities, churches
You need to set aside money each month for those yearly and quarterly payments that often sneak up on you when you least expect them. If you spend $1,200 on your yearly property taxes, divide that number by 12 and set aside $100 per month so that you are not caught off guard by your property taxes, insurance payments, or any other periodic bills.
Within each general budget category, some items are essential (the mortgage or rent payment, the electric bill, and groceries), but other items are extra (new furniture, gifts, and pizza delivery). From your first list of general budget items, develop two separate budget lists, one for essentials and the other for extras. (I can't dictate what's essential and what's extra for other people, so I haven't divided up the lists for you. Some people may have to eat out regularly because of work-related issues and so dining out is an essential item in their life rather than an extra. Others may consider charitable giving an extra while their friends down the street consider it non-negotiable because of religious convictions.)
After you divide your expenses into two lists, look through both your essential and extra lists to find flexible budget items such as clothing, groceries, and other food-related expenses where you can cut back using the tips and advice throughout this book. Make
a star next to flexible items in each of your lists so that you can identify them easily.
Estimate that you spend
Go through your checkbook and any other receipts or records you've kept over the past few months so that you can track how much you actually spend on essentials. Then for one month, keep a detailed diary of all your extra purchases, even for cheap things like newspapers or coffee from the vending machine at work. Little expenses quickly add up to big money when they're made on a daily basis, and these smaller out-of-pocket purchases that are frequently made with cash usually won't show up in your check register, so writing them all down helps make you aware of where the cash is dribbling out of your life.
After you've discovered exactly where your money goes throughout the month, you may need to reevaluate your written budget lists if you find your actual spending differed from your anticipated spending.
Calculate and adjust
Now that you've made two lists of budget items (essentials and extras), use the two lists to see if your spending habits are keeping you in the red.
Add up the essentials list and the extras list separately. Subtract the essentials total from your monthly income. If you have money left over, subtract the extras total from that amount. If you still have money left over, great! Look into a savings or investing plan
(talk to your bank or a certified financial planner for help setting up a plan). But if your extras list takes you into negative numbers, start looking for places to cut back (for example, cancel your newspaper delivery or eat out once a month instead of once a week). You can also trim from the extras list in order to put more money toward debt repayment if that's a high priority in your financial picture. The rest of this book is dedicated to helping you save money on various expenses, so don't give up hope if you find you need to drastically cut your spending in order to stick to your primp budget and live within your means.
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