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Build a budget (without pulling your hair out)

Rachel Hartman

October 20, 2014

Does the idea of having a budget make you want to run away screaming? Yet, do you have trouble making your money last until the end of each month?

Turning your finances around — and staying in the black each month — doesn't have to be an impossible task. You probably just haven't been given the tools to make a budget that works.

“Think of it as a blueprint,” suggests Lori Atwood, RFC, founder and principal of Lori Atwood-Fearless Finance, a financial advisory firm. A budget will help you see where your money goes, take control of spending and meet financial goals. A budget can actually free you to afford the things you want and need, rather than racking up debt on credit cards and borrowing from family when your car breaks down.

So, don't run away screaming. Get started with making a budget that actually works. Here's how:

Track expenses.

Set aside two months to follow your dollars. Use what works for you: a pen and paper, spreadsheet, or apps such as Toshl Finance, Hello Expense, or Expense IQ-Money Manager.

Don't change habits, and don't try to analyze the numbers at first. The key here is to identify your regular purchases.

As you catalog the expenses, come up with categories that work for you. Labels might include groceries, house maintenance, mortgage or rent, car payment, gas, medicine, eating out, entertainment and so on.

Be brutal: List exactly how much you spent and what you spent it on.

Keep your grocery receipts, because you will likely need them for your next step. Also, keep your itemized bills for utilities and credit cards.

Analyze the numbers.

This exercise is bound to be eye-opening. “It's very similar to writing down everything you eat when trying to lose weight,” says Kevin Gallegos, vice president of Phoenix operations for Freedom Financial Network. You might be surprised to see how often you get takeout for dinner, or where you swipe your credit card each month.

You will likely find that your habits are pricey. That soda you buy every afternoon after school for $2 quickly adds up to $40 or more a month.

Now that you've recorded expenses for two months, look for trends. Are you likely to go out to eat as soon as you get your paycheck? Do you tend to get fast food after a long day at work?

Look at income.

Consider what you earned in the past two months. For each month, figure out your total income, including salary and any money from side businesses or goods you sold.

Then subtract expenses from your income. “If the resulting number is negative, you must face the facts,” says Gallegos. You need to find a way to cut expenses or increase income.

“To make budgeting more successful, it needs to be tied to what you want to do in your life.”
— Kevin Gallegos

To cut expenses, consider three expenditures: groceries, eating out and entertainment.

Review your grocery receipts. Can you cut out dessert items? Are you buying a lot of prepared foods, when it would be cheaper to cook?

For eating out and entertainment, take the amount you spent and cut it in half. Now, figure out how to make that new number work. Pull out your utilities bills from the previous two months. Maybe you don't need the level of cable you have. Maybe you don't need cable at all. Are you paying premium for movies and TV shows on Amazon when you could have a cheaper Hulu membership? Instead of going to one concert a month, try one concert a quarter.

Also, look into whether you will save money by paying bills automatically each month. Some companies offer discounts if you opt in to automatic debit.

Finally, take a close look at your credit card bills. Are you paying for items that you don't use? Maybe you are spending $75 a month for a gym membership, or $10 a month for magazine subscription you don't read. Ask yourself: Do you love it? Do you use it? Can you live without it?

A note about credit cards.

If you have credit card debt, make it a priority to eliminate it. Pay more than the minimum, and pay until it hurts. Get a temporary weekend job, put the cards in a drawer and cease with the fast food or other “splurges.” You are paying thousands in interest, otherwise. For example, if you owe $5,000 with 17 percent interest, you would pay almost $1,000 in interest costs over two years, even while you are paying $250 a month.

Use a calculator to figure out a plan for paying off the debt. Once the debt is paid off, pay your card bills in full and on time each month.

Heads up: If you have rewards cards and carry balances on them, you'll pay much more in interest than you earn in rewards, so stop using them until you can pay in full and on time each month. In fact, avoid using them until you've reached six months to a year of spending less than you earn each month.

Set goals.

“To make budgeting more successful, it needs to be tied to what you want to do in your life,” explains Gallegos.

Think about what you want to accomplish in the next months or year. Then write it down. The goals can be small, such as not spending more than you bring in during the next months, or perhaps taking a vacation next year.

Put it all together.

Armed with the knowledge of what you've been spending, as well as clear goals, you're ready to create a workable budget. “Plenty of software is available (much of it free), but a spreadsheet or pencil and paper can work just as well,” notes Gallegos. A few software options: AceBudget 2, MoneyWiz, BudgetEase, and Mint.

“There is no ‘one size fits all' when it comes to the elements of life.”
— Natasha Campbell

Whatever form you use, you'll need to list your monthly household income. Then note the categories you made for expenses during those two months. Add a category for unforeseen costs, and allow for some cash in that category each month. That way, you'll be ready for surprise expenses, such as a car repair.  Experts advise that you have six months' worth of your salary set aside, but don't let that number discourage you — start by saving $20 to $50 a paycheck, then increase by increments of $10 every month.

Be flexible.

“There is no ‘one size fits all' when it comes to the elements of life,” notes Natasha M. Campbell, the founder and CEO of Lifestyle Success Unlimited, which gives financial advice.

So if the budget you just created doesn't line up exactly with your flow of funds during the first month you try it out, don't be discouraged. Use the results of that first month as a guide to tweak the budget for the following 30 days. Do the same the next month.  Just make sure you keep receipts for the month in an envelope so you can jog your memory.

Each budgeting step you take will be worth it. “With practice and repetition, you will build your momentum,” says Campbell. “You are doing something today that your future self will thank you for.”