Tuesday, April 13, 2010

Budgets: Part II

In Budgets: Part I we examined why budgets are so important and how they can act as a map, guiding us towards our chosen financial destination. We wrapped up part one with an expense brainstorming exercise to help us gain a clear picture of where our income is going, right now. If you haven't read part one yet, I encourage you to do so (just click here) and to complete the expense brainstorming session for yourself. Today we're going to build off of that list to create and hone a budget specific to each of our individual needs and priorities. Plus, I'm going to share some awesome digital budget resources you won't want to miss!

So you've already identified what you spend now, and where each precious dollar you possess finds a new home - be it a more permanent resting place in your IRA or in the narrow confines of the Forever 21 cash register. So now what? How does this help me, you may wonder, if my current spending habits are what I'm trying to change? We are going to use the expense template you’ve created as the basis for a more ideal monthly budget. The first step is to break down the items in your expense list into one of the following categories:
  • Regular Expenses – These are the expenses that you have to pay on a regular basis, like your phone bill and rent, and are consistent in size from one payment to payment to the next (i.e. an arm and a leg this month, a similarly sized arm and leg next month…). Debt payments, should you have them, also belong in this category.
  • Priority Expenses – These expenses are the couple items (try for no more than 2) you choose from your remaining list that are really important to you and you couldn’t imagine skimping on. For some of us, this might be Fido’s food fund or the best fresh produce your grocery has to offer. Others may be willing to stick to the culinary staples at home as long as they can spend the weekend out on the town.
  • Shrinking Expenses – These expenses include everything that’s left over and is where you’re going to start shaving off the dollars.
Once you’ve identified which category each of your expenses falls into, you can begin to create a budget that reflects your current situation and your personal preferences (while identifying the quickest, easiest places to start making changes). There’s no better way to play with the actual numbers that correspond to each of these expense items than with a computerized budget. By using one of the templates I’ve linked to below, most of which are free excel documents you can download in mere seconds, you can quickly compare your fiscal bottom line should you get your hair cut at Irina the Swedish Scissor-hands’ Salon versus a no appointment necessary stop at Supercuts.

ChristianPF has 10 free excel budgets to download. I especially like the first one, but scan through them all to see what looks most appealing.

Suite 101 also has some resources and tips for using budget templates which you can tailor to your personal needs.

And when in doubt, go straight to the source! Microsoft Office has a personal budget to offer you too.

Go ahead and play with the numbers. Be open to experimenting with different scenarios - see how much you could save if you cut out those trips to the manicurist or if you ditched your gym membership for a morning jog outside, figure out what the impact would be in a year's time if you curbed your grocery budget by $7.50, and calculate out what dropping that soda habit could mean for your nest egg. The idea is to not feel tied down to any finalized budget just yet, but to get a feel for the impact that shrinking expenses can have. Be sure to stop by next time for Budgeting: Part III where we'll discuss solidifying your budget and sticking to it!

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