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  • Budget Planning: How to Budget

    Posted on January 16th, 2011 William No comments

    For many people, a budget is a strange and terrifying thing. They fear that a budget will suck all the fun out of life, telling them what they can spend money on and when, and will lead to nothing but family fights.

    However, if done properly, a budget is actually a key tool on the path to financial freedom. Rather than being a constricting document, it frees you from worrying about what you can afford and how much money you're going to have left each month. You no longer have to worry about whether you'll have sufficient funds remaining to pay your bills, because every dollar is allocated before the beginning of the month.

    This doesn't mean removing all spontaneity and just for fun spending; it just means that you factor it in. For example, suppose that your after tax salary is $2000 per month. (We'll assume this is also after contributing enough to your 401(k), if available, to get the maximum amount of matching funds). Your budget might look something like this:

    Rent $800
    Utilities $250
    Insurance: $150
    Car Payment $200
    Savings $250
    Gas: $50
    Food: $200
    Blow: $100

    As you can see, a budget doesn't have to be particularly complicated. You have each area scheduled, including "blow", which is money that you can spend on anything you want, whenever you want, without feeling guilty. Want to go to a movie or pick up a new video game? You can - you've budgeted for it!

    Notice that savings are part of your budget; this is very important, as money that isn't budgeted will, almost inevitably, end up getting spent by the end of the month! When you first start using a budget, your savings should probably go towards an emergency fund so that you have cash available if you need it; once that fund is built up ($1000 is a good number), it can go towards paying off debt instead. For the most part, paying down debt is the same as saving (and pays a better interest rate to boot!) but you want to make sure you have some money available for emergencies.

    Of course, budgeting can be slightly more complicated when more than one person is involved, as you're likely to have some disagreements on exactly what should be cut if you need to reduce some of your spending, but that's still a lot better than not having a budget and not knowing where your money is going! Start by making a list of all of your current spending, classify it, and then talk about whether you need to cut down on spending and by how much. This doesn't have to be painful; for example, if you spend too much on eating out, you could change that by learning to cook together. The important thing here is to track all of your spending for at least a month so that you have an accurate idea of how much is actually being spent on each activity; to improve something, you first need to measure it.

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