What is a Budget?

Budgeting and managing your cash flow are flip sides of the same coin. Both essentially revolve around planning for what lies ahead in your financial future. The starting point always involves a good, thorough budget, which includes the side-by-side comparison of income and expenses. Once a solid budget is in place, managing your cash flow is really just a matter of setting aside any extra money you have in some months to help cover the shortfalls you’ll have in others. Budgeting and managing your cash flow are highly personalized decisions, so you’ll have to think about what you need, what your values are, and what you’re good at (or not so good at) in order to come up with a plan that works best for you.

First Steps

Realize you've got to have a budget!
No matter how much money you make, you can still spend more. Most lottery winners end up broke thanks to overspending. So no matter how much, or how little, money you make, you've got to have a budget.

Stop worrying about it.
Making a budget doesn't need to be a scary or intimidating process. You're actually going to experience great peace of mind once you've got your money under control. You'll also feel less guilty about spending on the things you want if you know that you're spending the money you've specifically budgeted for those items.

Start by tracking your current spending.
Before you can create a realistic budget, you need to write down everything you spend (yes, really... everything you spend) for about three months. This list will give you the information you need to create a workable budget.

Decide what your priorities are.
You can't afford everything you want (neither can anyone else). Be honest with yourself about what you need versus what you want. And, be ready to compromise, especially if you're married.

Determine what your goals are.
From short-term goals like a summer vacation to long-term goals like retirement, you have to know where you want to go in order to come up with a plan for getting there.

Making a Budget

A good budget is an annual budget. There are too many expenses - like car insurance, medical bills, and holiday gifts - that are not spread evenly throughout the year. If you only do a monthly budget, then you're dramatically underestimating your actual expenses. Feel free to think even longer into the future, especially if you're a homeowner. Furnaces and roofs need to be replaced every 15 years or so, and the money to pay for these large expenses isn't going to magically appear just because you need it.

You can create a simple budget with pencil and paper, or you can generate something more sophisticated in a spreadsheet. If you need help, there are many options online like www.mint.com and www.myspendingplan.com.

After you’ve tracked your actual spending, you will have a nice guideline for your budget. Identify what your major expense categories are and decide how much you want to spend on them. This is also an opportune time to look for places you can cut back, too.

Make sure you have a category for "miscellaneous" expenses. You can't predict everything, and life has a way of “happening.”

Sticking to a Budget

There’s no benefit to lying to yourself, so be honest about your spending habits. If carrying a new Coach bag every season or buying the next generation smartphone is important to you, don't lie to yourself about it, just fit it into your budget.

Be overly cautious about your expenses. Estimate things like utility bills to be a little bit higher than you actually think they'll be. Then, when the real bills come in and you find you're under budget for the month - always a nice surprise!.

Monitor your performance on a regular basis. Each month, compare your actual spending to your budget, and you can make the necessary adjustments if you find that you're spending more than you've budgeted for. Budgets are living and breathing entities, so be ready to be flexible.