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Even a CPA thinks this topic is boring. So why did I choose this topic to discuss? Because unless you have an unlimited supply of cash and savings, it is probably something you should think about and consider. Most people think of a budget as a set of rules that tell you where you can, and more often can’t, spend your money. I try to think of a budget as a tool -- something you use to achieve a goal. Maybe your goal is a special vacation or a new house. Maybe it’s saving for your kids college education or your retirement. Or maybe it is much more basic, such as paying your monthly bills or paying off your credit card debt. Whatever your goal may be, a budget can help you achieve it.

To develop a budget, you need to know what you make and where you are spending your money. The best way to accomplish this is to track every dollar your household earns and spends for one month. This is probably not as difficult as it sounds. Your check register already tracks any checks you write and deposits you make. And, every time you use your credit card, you get a receipt. What you are left with is the cash you spend. For this, you need to keep a log noting every dollar of cash you spend.

At the end of the month, summarize all of your transactions and develop your budget. To do this, you need to assign categories to each expense. Each household will have slightly different categories, but a typical one could be as follows:

Now it is time to develop a budget. I like examples, so let’s use a fictional family. We’ll call them the Jones’. Tom is a carpenter. His wife Judy works part-time at a local department store. They have two kids, Tom Jr. who is 6 and little Susie who is 3. They live in a modest house in the suburbs and Tom is saving for their retirement with his company’s 401k plan. They know saving is important but never seem to have any additional money left at the end of the month to save. They feel if they had a budget they could better control their spending and be able to save. They have three main things they want to save for: an emergency fund, college for the kids, and an annual family vacation.

Both Tom and Judy kept track of all their expenses last month. It wasn’t easy, but now they have a snapshot of where their money is going. They assigned categories to every expense and then totaled each category. Below is what they found:

Now that we know where they spend their money, we can develop their household budget. To do this, we need to decide if this was a "typical" month. For Tom and Judy, it was. Their paychecks were average as were their other bills for the month. Remember, their goal was to be able to start saving for an emergency fund, college for the kids and an annual vacation. Last month, they had $110 to put away. That’s a start, but it won’t get them far.

To develop the Jones’ budget, we will use their actual month as a starting point. From there, we will adjust their spending in certain categories and try to achieve their goal of saving. Their required expenses do not change month-to-month so they were the easiest to budget. On the other hand, their flexible expenses could be adjusted. The food budget was set at a lower amount than what they have actually been spending. Food is an area that many families, with proper planning, can cut expenses. By shopping sales, using coupons and making more meals from scratch, it is a fairly easy area to save money. Entertainment is another area where many families can cut back and where the Jones’ found they could reduce their spending. This doesn’t mean cutting back on family activities or having fun. It just means being a little pickier on where you choose to spend your entertainment dollars and also making use of the free activities communities offer. By making these changes in how they are spending their money, they can now achieve their goals of saving for an emergency fund, their children’s college fund and an annual family vacation. This is what their budget now looks like:

Tom and Judy have a budget. Now how do they stick to it? The key is discipline. It is always knowing how much money you have remaining in your budget and only spending if your budget allows. There are many good computer programs available which can help track your expenses and budget. One may have come pre-loaded on your personal computer. You can also use a notebook with one page for each category. At the top of the page, write your starting budget amount. Then, as you spend money throughout the month, write down what you purchased and subtract it from your budget. This will give you a running total of what remains in your budget. Another good way is by using envelopes and cash. Have an envelope for each category. You can skip the categories that you pay by check and that don’t change month to month, such as your mortgage and insurance. At the beginning of the month, put cash in each envelope totaling the amount of the budget. Then, use this cash to pay your expenses throughout the month. Whatever cash is in the envelope is what you have left for the month. It’s a great reminder as to how much you have remaining. Just remember to take cash out if you need to charge or write a check for an expense.

Whatever way you choose to make your budget work, the key is to stick to it and to always know what remains in your budget. Good communication is key. Budgeting is not easy, and I guarantee there are things more fun, but if you have specific financial goals, it’s important. Give budgeting a try. Fine-tune it as you go, and good luck!

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