According to Napoleon, an army marches on its stomach. On our journey we need something just as basic to keep ourselves nourished. We need a budget.
Despite all of the negative things you may think or feel about budgets, they are one of the most useful tools you can use on your journey. Budgets are the gatekeepers and they can wield a lot of power. You can use them to grow your investments, pay off your debts, and make even your wildest dreams come true.
Budgets come in all shapes and sizes. They can be formal or informal. You can create your own on an Excel spreadsheet or use online or offline software. In either case, your budget will only be as useful as the information it is based on so do some homework before you develop one. Begin by collecting information on your spending habits. For the next month, write down every penny you spend. Keep a journal that includes at a minimum, the item, the cost, and how you paid for it (cash, check, or charge). (Microsoft has a great template you can download to get started and there are tons of other options on the internet if you search for budget templates.)
Once you collect your basic spending information, review it to see if your money is really going where you want it to go, if not, make a note of the changes you would like to make, especially if you are spending more than you are earning. Next, set up your budget. My recommendation is that if you are new to budgeting, for the first six months you set up a formal budget and at the end of each month you also compare what actually happened to your budget projections. This will allow you to see clearly what is going on with your money and to tweak your budget until it fits your goals and your lifestyle.
Once you understand the basics of your budget, if you like, you can shift to a more informal budget like one that allocates a percentage of your income for expenses, saving, investing, and charity. One example is the 70-10-10-10 budget. This budget allocates 70% of your income to expenses, 10% to savings for immediate goals or a cash reserve, 10% for investing, and 10% for charity. This is an easy budget to follow and it can save you a lot of time. Remember, regardless of the method you choose, never forget that he overall goal of any budget is to steadily decrease the amount allocated for expenses and increase the amount you invest — this will mean more food for the journey and substantially increase your chances of success.
Patricia Stallworth, CFP® and CDFA, is the president of PS Worth, a financial education company, the author of Minding Your Money, and the host of the Minding Your Money Minute™. Learn more by visiting MindingYourMoney.net.