Record Your Expenses, Set Goals, and Make Adjustments
Step Three: Record Your Expenses
When you've identified and listed monthly estimates for your budgeted amounts, use your checkbook to record your expenses for the month in the appropriate categories. Don't forget to record your cash expenditures. Jot them down them in a little notebook as you spend the cash, or scribble them on a piece of paper and stick it in a file to be categorized and totaled at the end of the month. You may be shocked at where your cash goes, especially if you make frequent ATM withdrawals from your bank accounts.
Subtotal the income and expense categories and (drum roll, please!) subtract the total expenses from the total income to arrive at your net income. If you've recorded all of your income and expenditures for the month, this will be the amount of money you have left over for savings, emergency funds, etc.
If the number is negative, your expenses are greater than your income. Don't be discouraged. Chances are, your situation can be greatly improved by changing your spending habits.
If you're fortunate enough to have a positive net income, be sure to transfer most of it to a savings or investment account at the end of each month. Extra cash left in a regular checking account has a way of getting spent.
Step Four: Set Goals and Make Adjustments
After you've tracked your actual spending for a month or two, you'll be better able to identify where you can comfortably make cuts and adjustments to start saving money. Consider this a process of self-discovery. Many people don't have a clear idea of where their money goes until they start tracking their spending, and then they are usually very surprised at how much they spend in certain categories over a month's or several months' time. You can't control your money until you know how much you have and where it goes.
Once you've got the budgeting process in place, take an in-depth look at your largest spending categories, brainstorm about ways to reduce spending in specific categories, and set realistic goals. Don't overlook the smaller spending categories, either. Sometimes these are the easiest to make cuts in because the spending may be more discretionary, and small amounts can add up quickly.
If you stick with the budgeting process past the first month or two, you'll begin to see a pattern in your spending, and you'll be able to identify areas where you can painlessly save money that you can use to build an emergency fund or save for an important purchase or goal. Cutting costs becomes a challenge that can be very rewarding, especially as you see your savings grow. Following a budget can set you free from the burden of debt and the constant worry that you won't be able to obtain your financial goals.
Share Your Cost-Cutting or Budgeting Tips
If you have any tips or ideas about budgeting or cutting costs that you'd like to share, please post them in the Budgeting thread of the Financial Planning forum.
See Page One: "Set Up Categories, Calculate Budget Amounts."
