With Budgeting, Slow and Steady Wins the Race

Budgets are a lot like diets: No single approach works for everyone; overly complicated plans rarely work for long; and sometimes it takes a few tries before you get it right.

One stumbling block for many people is thinking of a budget as a form of punishment rather than as a means to achieve their goals in life. Say you dream of buying a house: A budget shouldn't serve as a constant reminder that you can't afford a down payment; but rather, as a tool to help identify where the money goes each month so you can adjust your spending -- and saving -- accordingly.

Getting started. If you're new to budgeting or you haven't been successful in the past, start slowly. First, for a few months write down every cent you spend: mortgage/rent, utilities, food (including snacks and coffees), gas, medical copayments, birthday presents, credit card interest, children's allowances -- the works. Also, divide annual expenses like insurance and income tax into monthly amounts and add them to the list.

To help track what you spend, review your checkbook and credit card statements and hold onto all cash transaction receipts. Don't feel compelled to categorize expenses at first; just total them up each month. It sounds tedious, but I guarantee you'll be amazed by the bottom line. Eventually, you can start grouping expenses into categories, which will help identify items to trim.

At the same time, track your income. If your pay varies from month to month, average it out for purposes of this exercise. Comparing money coming in versus money going out can be quite enlightening. Breaking even or losing money each month may mean you need to find additional income sources and/or aggressively alter your spending habits. You'll probably ask yourself, "Do I really want to spend $60 a month on coffee?" and "How can I reduce my utilities bills?"

Budgeting tools. Many tools are available to help track income and expenses. You can go the pencil-and-paper route by downloading a budget spreadsheet template (Google "Budget Worksheet" to find one you like). Interactive, online budgeting calculators that can help you plan for a variety of expenses also are widely available. For example, Practical Money Skills for Life, a free personal financial management program run by my employer, Visa Inc., includes budgeting calculators for everything from back-to-school costs to holiday expenses to retirement.

Once you're ready to go to the next level of managing your finances, many software packages and online account management services are available -- some are free, while others charge a one-time or monthly fee. Among the more popular products are Quicken, Mint.com, Yodlee, Mvlopes and YNAB (You Need a Budget). Some, like Mint and Yodlee, can be accessed online, including by smart phone; others, like Quicken, must be accessed from a dedicated computer.

Commonly available features include:
  • Account aggregation, where you can import transaction information and balances from bank, credit card and investment and other accounts into one common database -- this avoids having to go to multiple websites.
  • Transfer money between accounts; some also allow online bill payment.
  • Track, categorize and annotate transactions -- also helpful when calculating income taxes.
  • Some offer interactive charts and graphs to help visualize changes in spending and savings habits.
  • Budgeting tools and tips.
Setting goals and changing behavior
. Start jotting down your short- and long-term financial goals. These might include buying a new car or house, saving for retirement and vacations, paying off debt, financing college and building an emergency fund for expenses like car repairs, broken appliances, unexpected medical bills, etc. Eventually you'll need to figure out what those things will cost so you'll know how much to save -- and by when.

It's at this "behavioral change" point, when the compilation of so many long-term goals seems overwhelming, that many people give up on budgeting. Think about the tortoise and the hare: Slow and steady wins the race.

You won't solve all your financial challenges at once, but you can start whittling away at them. Over time, you'll notice gradual improvements and be encouraged to up the ante -- it's like losing weight gradually and keeping it off versus drastic weight reduction.

Here are a few suggestions:
  • Once you've started categorizing expenses, look for items that stand out as extravagances you can trim or eliminate, at least temporarily (meals out, unused gym memberships or magazine subscriptions, unneeded shopping sprees, etc.)
  • Ask insurance companies how much you can reduce premiums by raising deductibles.
  • Always pay at least the minimum balance on loans and credit cards to avoid late charges. List accounts by interest rate and pay off those with the highest rates first.
  • Create separate savings accounts for different long-term goals and have contributions automatically deducted from your paycheck or checking account -- even if it's only a small amount each month. Online banks and credit unions often will allow multiple accounts with no minimum balance requirements or service charges.
  • Try not to borrow from one "account" to pay expenses in another. Especially don't raid your retirement accounts -- the tax implications alone are daunting.

This article is intended to provide general information and should not be considered legal, tax or financial advice. It's always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to you and about your individual financial situation.

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