Part 3 (1/2)

Health care: $100 .

These numbers are targets. Every month, do your best to stay within the goals you set, but be willing to make course corrections based on your actual habits. For instance, if your family struggles to keep your dining out expenses under $300, you might b.u.mp your target spending in that category to $400 and drop your entertainment target to $300.

If you really wanted to get more detailed about your spending in a certain category, you could break things down further. Say you wanted to know where all of your entertainment spending is going. To find out, you might create sub-categories for movies, concerts, and sporting events.

This is just one way to create a more detailed budget; you need to choose a level of detail that's right for you. I recommend starting broad-maybe just using a basic framework for a month or two-and then adding detail as needed. One reason budgets fail is that people try to get too detailed; so start basic, and then add enough structure to meet your needs. The benefit of starting simple and adding complexity-rather than doing the reverse-is that you add only the details you need instead of being overwhelmed with too much noise at the start.

You're more likely to stick to a budget if the categories you track reflect your situation and spending habits, not somebody else's. Make sure your budget reflects your goals and values: If you want to travel, then budget for travel; if you want to donate 10% to your church, then budget for t.i.thing. The next section has more tips for sticking to your budget.

Frequently Asked Question: When Is It Okay Not to Budget?As valuable as budgets are, not everyone needs one. Some people have mastered their finances, and others have a clear idea of where their money is going. Here are some situations where you may not need to budget: - You have a huge surplus: Your income is far greater than your expenses and you have a large cash cus.h.i.+on in the bank.

- You're meeting all your financial goals: You have an emergency fund, are saving for retirement, and are meeting your other targets.

- You have no consumer debt: You don't carry balances on your credit cards and you don't have a car loan; your only debt is your mortgage and you can afford the payments.

- You don't worry about money: You never feel stressed about your financial situation, fight with your partner about spending, or wonder how you're going to make ends meet.

Even though you don't need to budget if these things are true, it's still not a bad idea to track your spending; a budget can help you see if your rosy financial situation is taking a turn for the worse.

Sticking to a Budget.

There's more to budgeting than just putting numbers down on paper. Drafting your framework and setting up categories is all well and good, but it doesn't mean a hill of beans unless you adjust your behavior accordingly. Whether you stick to your budget depends on how you spend money on a daily basis. The following sections offer strategies that can increase your odds of success.

NoteIt can take time to get your spending to match your budget, so be patient. It may take several months to get the kinks out. If you're struggling, change tactics: Switch from a detailed budget to a loose budget-or vice versa. And if you suffer setbacks, the list on Coping with Mistakes and Setbacks Coping with Mistakes and Setbacks has strategies to help you cope. has strategies to help you cope.

Tracking Your Spending.

If you struggle to stick to your budget (or struggle with money in general), it may help to track your spending. It can be a tedious process, but what you learn about your spending habits makes tracking worth the effort. Without doing this, it can be hard to know how much you've really been spending-and what you've been spending it on.

Tracking your spending demystifies money and puts you in control. You'll have a heightened awareness of your financial habits, which will let you make changes to improve your situation. By looking at the details, you'll have a better sense of your overall spending and begin to understand how your one-DVD-a-week buying habit affects other parts of you your life.

The cla.s.sic book Your Money or Your Life Your Money or Your Life recommends that you keep a daily money log to record your spending. This log can take any form: a pocket-sized memo book, a computer text file, a spreadsheet, personal-finance software-whatever. recommends that you keep a daily money log to record your spending. This log can take any form: a pocket-sized memo book, a computer text file, a spreadsheet, personal-finance software-whatever.

Every time you get money-from a paycheck or a garage sale or by picking up change off the ground-write it down. Every time you spend money-paying bills or buying coffee or paying bus fare-write it down. Keep track of every penny that enters or leaves your life.

NoteWhen you track your spending, it's important not to make judgments. This activity is meant to describe your money habits, not to change them. (You probably do want to change them, but that's a different task.) So write everything down, whether you're proud of it or not.

Some transactions are easy to forget, like when you pay with cash or buy stuff online. To help you remember: - Get a receipt for everything. Make a habit of asking for receipts, and keep them in one place so you know where to find them.

- Record your transactions weekly. Some people track their spending daily, but it can be hard to detect patterns when you look that closely. Besides, daily bookkeeping can be a ch.o.r.e. You'll probably have more success if you record your transactions weekly. A good strategy is to make it a habit-do it at the same time every Sat.u.r.day morning, for example.

This process will show you your actual spending habits-which may not match what you think they are. You can then use this knowledge to fine-tune your budget and set financial goals. At the very least, you'll get a snapshot of where your money has been going.

Frequently Asked Question: How Detailed Should My Records Be?When you first begin budgeting and tracking your spending, it's tough to know how detailed you should get. Should your budget simply include a Food category, or should you break Food into Groceries and Dining Out? Should you track produce separately? If you go to the store and buy a $3.19 bottle of shampoo and an $0.89 pack of bubblegum, should you record both as groceries?The answer is: Track what's important to you. Remember that what gets measured gets managed. In other words, the things you track are things you'll be better able to control.If you think you spend too much on candy, then track it. If you want to know how much you spend on beauty products, track that. But don't go overboard; if you have too many categories, tracking gets tedious. Also, be consistent: If you decide that shampoo counts as groceries because you buy it at the grocery store, then include it in that category every time.

Envelope Budgeting.

The envelope budgeting system is a simple method that you can use with any sort of budget to help you manage your spending. The basic process is this: When you get paid, you put cash in various envelopes designated for specific budget categories. Here's how it works: 1. Choose your categories. You should have one envelope for each category you plan to track. Write the category's name on each envelope.

2. Set money aside. After you deposit your paycheck, withdraw cash for each budgeted category. So if you've budgeted $200 for groceries, put $200 in your Grocery envelope and note the amount on the back.

3. Spend as usual. Throughout the month, take cash from the envelopes to make your purchases. Write your withdrawals on the back: If you spend $77 at the grocery store, note that you have $123 left for the pay period. After you buy something, put the receipt and the change back in the envelope.

4. When an envelope is empty, you're done. If you run out of money in an envelope, you have two options. Hardcore budgeters argue that you should suck it up until your next paycheck rolls around; once you've spent your entertainment budget, that's it. (”How else will you learn discipline?” they ask.) Others say that it's okay to take from one envelope to fund another. Whichever route you choose, the important thing is not to resort to credit-that would defeat the whole purpose of this cash-based system.

5. Decide what to do with the leftovers. At the end of the pay period, if you have money left in an envelope, you can leave it there to bulk up that category for the next round. Better yet, use the surplus to pay down your debt or make a deposit into long-term savings.

6. Do it all over again with your next paycheck. If you discover that you always have a deficit or surplus in certain categories, adjust your budget accordingly.

TipThis YouTube video does a fantastic job of explaining envelope budgets: tinyurl.com/envelope-budget. The Frugal Dad blog has a more in-depth explanation of the system: tinyurl.com/frugal-envelope.

You can use this method whether your budget is simple or complex. If you don't want to ha.s.sle with actual envelopes-or carry around large amounts of cash-check out Mvelopes () or YNAB (), software that lets you manage your budget using virtual envelopes; learn more on Web-Based Tools Web-Based Tools.

Think Yearly.

If you're having a tough time staying within your budget, the problem could be that you're trying to predict your spending over too small a time frame. A study published in the Journal of Consumer Research Journal of Consumer Research in August 2008 found that folks who made annual budgets did a better job of predicting what they'd spend than those who made monthly budgets. in August 2008 found that folks who made annual budgets did a better job of predicting what they'd spend than those who made monthly budgets.

Yearly budgets are more accurate because people consider more expense categories when thinking long-term. If you build a monthly budget in April, for example, will you remember to include a category for Christmas gifts? If you instead take the whole year into account, you'll remember to include stuff like that.

The downside of yearly budgets is that they aren't very useful for planning day-to-day spending. The solution is to get the best of both worlds: - Create an annual budget first. It's easier for most people to estimate yearly expenses than monthly ones.

- Make a monthly budget based on your annual one. Once you have your annual budget, divide the estimated expenses in each category by 12 to get monthly numbers.

Voila-you've got yourself a monthly budget that takes seasonal expenses into account.

Automating Your Budget.

Whether you use a simple budget or a more detailed one, do yourself a favor and automate the budgeting process.

The past two decades have seen a revolution in personal finance. It used to be that you had to balance your checkbook by hand every month. You'd take your bank statement, your receipts, and your checkbook register, record all of your transactions, and then try to make sure everything matched; it was a laborious and often maddening process. And if you tried to keep a budget at the same time, it could be even more frustrating.

Some people like using pencil and paper to track their money; for the rest of us, personal-finance programs make it easy to track spending and build a budget. Your biggest decision is whether to use software you install on your computer or an online program. The next two sections explain your options.

Desktop Software.

A few years ago, you could choose from several well-known personal finance programs for your computer, but now there's only one: Quicken. With the extinction of Microsoft Money, Inuit's Quicken is the last major money-management program out there.