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Five Steps to Effective Budgeting

By Erik Folgate

The foundation of developing good financial habits as a college graduate or recent graduate is creating solid budgeting skills. Budgeting is not an art, it is a skill that is taught by practicing over and over again. You do not need a degree in finance to create and maintain a budget. Follow these simple steps to create a solid budget.

Step 1: Gather Information.

Gather together all of your bank statements, receipts, and credit card statements for a given month. Create a number of categories for living expenses such as food, gas, rent/mortgage, utilities, clothing, loan payments, etc. Based on the information you gathered, make an educated estimate for the amount that you spend in each category. Also, figure out your take home income (total monthly income minus taxes).

Step 2: Write it Down!

The biggest mistake that so many households make is that they skip the easiest step in the budgeting process — writing down the budget! You must write or type out your budget. There is something powerful about seeing it on paper rather than keeping it in your head. This is a good template for those of you with Microsoft Excel. It allows you to type in the projected and actual budget amounts.

Step 3: Spend Your Money on Paper

This is a very important step. There are two methods of budgeting: looking back and looking ahead budgeting. Looking back budgeting involves spending all of your money and keeping track of where it all went at the end of the month. Looking ahead budgeting means spending the money on paper in the beginning of the month, and then spending within the designated amount in each category. The latter is the only method of budgeting that is effective. If you write down $500 for food for the month of February, then you have $500 dollars to spend at the grocery store that month. You spend only that amount for the month.

Step 4: Create a System That Works For You.

Organization is the key to a successful budget. Make sure you have a system that you stick to for setting aside certain amount of money for certain categories. One popular method for organizing a monthly budget is the envelope system. Take an envelope for the food category and pay yourself $500 (or whatever your amount is) by placing it into an envelope marked “Food Money”. Do the same for Gas, Entertainment, Miscellaneous Money, and Clothing. The rest of the money in your checking account will cover bills that need to be paid with a check or debit card. If you do not like keeping envelopes full of money around the house, then check out this online envelope budgeting system at the Mvelopes website.

Step 5: Be Proactive.

This step is what keeps a budget working every month. Obviously, your first budget will not be the most accurate when it comes to setting aside money for certain categories. At the end of the month, analyze your budget. If you spent $50 dollars less for Gas, but you spent $50 more for food, adjust accordingly for the next month. It’s never this easy, but you get the point. Also, be sure to analyze any categories where you spent much more than you budgeted. If you are spending $500 on entertainment when you budgeted $200, then ask yourself some questions. “Why did I spend this much on entertainment this month?” “Do I need to change my habits for going out?”

Follow these steps for budgeting and you will start to see the rewards when you have extra money at the end of the month! It will feel like you gave yourself a pay raise! The idea is to budget in an efficient way to end up with extra money at the end of the month. This extra money should be used for paying off debt aggressively, saving long-term, and establishing an emergency fund.

Erik Folgate
Erik and his wife, Lindzee, live in Orlando, Florida with a baby boy on the way. Erik works as an account manager for a marketing company, and considers counseling friends, family and the readers of Money Crashers his personal ministry to others. Erik became passionate about personal finance and helping others make wise financial decisions after racking up over $20k in credit card and student loan debt within the first two years of college.

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  • http://debtbeat.com Big Spender

    Budgeting doesn’t come natural to most people, especially on the heels of the “easy credit” decade. It’s worth investing a few bucks in a good budget planning book like The Budget Kit (http://debtbeat.com/2009/09/the-budget-kit.html)for worksheets and such.

    • http://debtbeat.com Big Spender

      Oops. http://debtbeat.com/2009/09/the-budget-kit.html

  • http://financialsecrets101.com Griff (Financial Freedom 5G Team)

    Good tips on budgeting. I agree that people just need to find a system that works for them. The key is that it actually WORKS! Most people start budgeting and end up quitting after a few months.

    I have found http://financialsecrets101.com and the 5G Plan to be very helpful in finding a maintainable spending and managing plan. I like being able to focus on the big wins rather than spending all of my time on the little things that don’t make much of an impact. Budgeting is one of those BIG wins!

    Thanks for the post!

  • http://www.artificialrobot.com Sean

    Great advice all around. When I still had credit card debt that I need to pay down, I started out with a big Excel spreadsheet. I was able to project out a year in advance my major spending categories, income, and debt payments. This way I could make a pretty good judgement of when I would be done with my debt. This worked out great for me and really helped to keep me on track and motivated since I could see the end.

    Now that I am out of debt I use mint.com to keep track of my budget. I really like that I can keep track of where I am in my budget on my iPhone and my wife can also check in and see our finances without having to fire up Quicken or anything like that. I think mint is definitely more geared towards “maintenance” budgeting over goal budgeting.

    Anyway, lots of good systems out there, find the one that is right for you and stick to it!

  • Jess

    I’m still in the process of figuring out what works for me, I have a lot of credit card debt to pay down ugh…I think I’m going to try the envelope system, I think that’s the only thing I haven’t tried. Might actually feel good to have cash for once!

  • http://www.financialhelpforsinglemothers.info single mom

    I am a single mom and its absolutely crucial for me to have a budget. I’d be lost in a sea of expenses if I didn’t have a budget and didn’t organize my finances properly. It’s not fun but it’s the only way to keep on top of it all.

  • http://www.jgw-annuity.com/ James

    you make some good points with writing it down and not just thinking about the process of a budget but the actual physical writing down of the #’s and seeing it first hand.

  • http://www.invest2donate.com Neil

    I use the free website www.mint.com. It has been great and works nice with your iphone or android.

  • terri arnel

    does anyone know where I can find the budget to save part on this site its for my college course I am so internet illiterate

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