Budgeting helps you get to the bottom of where your cash is going.
You probably like to make money, but chances are that you only have a vague idea of where it goes. Budgets can help with that, especially when your financial situation is complicated by a growing family or a home purchase. But in many households, "budget" is a dirty word.
Many people don't budget, says MSN Money personal finance columnist Donna Freedman, because it connotes deprivation, sacrifice and pain. "In fact, a budget is just a tool to make your money go where it will do the most good," Freedman says.
At its most basic, a budget is a plan for how you want to spend your money. It can also steer you toward specific financial goals, like buying a new car or putting aside money for retirement. Freedman's personal budgeting motto reflects that idea: "I save where I can so I can spend where I want."
Most importantly, though, a budget acts as an early warning system that alerts you when your spending and income are out of whack. It lets you identify and correct the problem before you wind up in over your head in debt [source: Kiplinger.com].
Budgets also can help couples and families talk about money. As you draw up and apply your budget, you'll get a clearer idea of what each family member is spending. The budgeting process clears away misunderstandings about where your cash is going. If you have kids, a budget teaches them about money and helps you allocate for things like child care, music lessons and other expenses [source: BankofAmerica.com-How to].
There are a few things you should always do when creating your household budget:
- Put it in writing. Just talking about spending is not enough. You need to put figures down in black and white, either on a ledger or in a budgeting software program.
- Build in flexibility. A budget that's too rigid is harder to stick to and can leave you discouraged. Always make sure you have some leeway for the unexpected.
- Keep a positive attitude. Budgeting does not mean scrimping and does not need to be painful.
- Expect setbacks. Some events, such as an illness or job loss, will put your budget out of balance for a while. Don't abandon your budget. Make the adjustments you need.
The most important step in drawing up a household budget is just getting started. So sharpen your pencils. On the next page, you'll go through the process step by step.