How to Budget

photo © 2010 Harsha K RFinance experts everywhere talk about budgeting as a major method to improving your financial situation. I agree that budgets are important. However, unless you are a finance nerd, you probably don’t understand how to keep a budget or have the will power to keep it up.

Fortunately for you, I have done a lot of research on the best budgeting tools around. Some are expensive, some are free. Some are manual, some are automated. I prefer free and automated, so I am going to share the why, how, and tutorial on getting started with a budget.

What is a budget anyway?

A budget is a spending goal for a period of time. A simple budget might be “spend less than $1,000 this month.” A more complex budget has categories for things like gas, food, entertainment, rent, insurance, clothing, and more specific subcategories.

Companies use budgets to track their spending as a benchmark to make sure profitability numbers are reached. You should be profitable too. Remember the personal income statement? That has a budget built in.

As the treasurer of a local non-profit, it is my job to ensure each committee stays within its annual budget. As the treasurer of my life, it is my job to make sure I spend less than I earn and meet my savings and spending goals. I use a budget for both of those.

How to start a budget

First, find your total monthly income. Subtract what you want to save in savings, investment, and retirement accounts. The result is your disposable income. Your budget has to be less than or equal to your disposable income.

Next, break down your fixed monthly expenses. Each of those should have a budget category. I use rent, utilities, auto insurance, and student loan as categories for my fixed expenses.

Next, figure out where your money goes. Estimate your expenses for groceries, restaurants, gas, entertainment, and/or other major spending categories. Remember, you pick your budget, it does not control you.

If you need guidance on what you should be spending, this is a good place to start.

Automate it

Why should I have to use a spreadsheet or a pen and paper to track my budget? I shouldn’t. I have used programs like Microsoft Money, Thrive, and Quicken for budget tracking. My favorite, and the one I use today, is Mint.com.

Mint is a free financial account aggregation tool with a built in automated budget tracking system. It can also track your investments, historical spending, and financial goals.

To start your automatic budget, sign up for a free account at Mint.com. Follow the easy online steps to add your banking account information. The site is incredibly secure and uses bank level encryption to ensure your data is safe.

Let Mint work for a few minutes to import and categorize your transactions. Mint can’t track cash, which is fine for me because I buy everything using a card so I get more rewards. The categories are not always perfect, so check through your transaction list and fix any errors.

Once Mint is done, it will suggest a budget based on your average spending. You might be surprised when you see how much you really spend. Use the budget you created above and adjust Mint’s budget to reflect what you really want to spend.

Stick to it

It is easy to ignore your budget once it is built. Luckily, Mint will e-mail you when you go over budget. I check in on the site every morning and use the Droid app to keep tabs when I am not by a computer. If I am ahead on a category, I cut back. If I end up under budget, even better.

Sticking to the budget takes discipline. You can change the budget whenever you want, but if you don’t follow it your efforts are worthless.

What did I miss?

Ask me, and other readers, questions about budgeting in the comments. I am always happy to help.