Saturday, January 1, 2011

Day 1: Create a Realistic Budget

I know this may seem like such a basic concept -- creating a budget -- and most people do have a budget. What most people don't have is a REALISTIC budget. Meaning knowing what they actually need for everything they buy in their day to day lives and being realistic about what you actually spend. If you know you have a Starbucks habit and spend $4 a day on coffee, that needs to be taken into account! If you're only budgeting $50 a week for food or eating out $24 or almost half of that is consumed by your coffee!

I know that there are certain things my husband and I like to do every month. For example, we like to go out to a nice dinner or go out to Dave & Buster's once each month to have a date night. This therefore is already planned into our budget so that there are no unplanned or charges turning up on the credit cards at the end of the month.

How to Create a Realistic Budget:

1. Know how much money your bottom line is for your monthly bills. If you only have $2000 in income, be sure your total budget comes out at $2000 or less. Otherwise you're going to end up short the next month or charging up your credit cards.

2. Start by making a list of ALL of your bills. Rent, cable, utilities, Netflix, cell phones, gas for your work commute - you name it. This includes everything that you get a set bill for every month. These are your non-negotiables. They are due every month and must paid. Also in this category should be groceries. Not eating out in general, but the money you spend at the grocery store for food for your family each month.

If you are looking to cut your budget down or save money, this is the time to look and see if there is anywhere you can lower these bills. For example, if you have Netflix and are on a 3 DVD at a time plan, consider dropping down to a 2 DVD at a time plan. This might only save you a couple of dollars a month, but over time that adds up! You can also look into cable plans that cut out channels you don't watch, reducing the number of minutes on your cell phone bill, carpooling, couponing, or implementing green ideas in your home to cut down your utility bills.

Now deduct the total of these non-negotiables from your total monthly budget. This gives you what you have left to allocate among those other areas you spend each month.

3. Now assess where else you spend money. Shopping, eating out, going out to the movies, video games subscriptions, etc. Here is where you begin allocating what you have left to spend. This requires prioritizing what is most important. Here is where your Starbucks habit is taken into account and you have decide whether it is more important to continue getting your morning latte or cutting back and saving that money or allocating it somewhere else.

Again, the most important part is to be realistic! Know that if you're spending the money, you account for it. If you're not honest with yourself, your budget will not do you any good.

4. Stick to your budget! If you know how much money you have to spend on each different thing and you can stick to it, you don't need to worry whether your bank account will be short at the end of the month.

5. Update your budget regularly. If you incur a new bill, a medical bill for example, that you know have to make a monthly payment on be sure to take that into account. You may need to adjust your spending on the extras until the bill is paid off. This may mean putting your Netflix on hold for a few months or drinking coffee at home or avoiding the mall.

Although it may seem difficult at first, a realistic budget is one of the best tools the frugal girl can have. It keeps you (and your spending) on track. And as you implement more of the frugal ideas I'm going to share with you over the next year, you will begin to see that budget shrink! This means that you will be able to either get more for your money or be able to confidently reduce your budget in those areas to reflect what you actually spend and save the excess. Either way, it's a win-win for your wallet!

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