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Why does it feel like “budget” is a four-letter word? A budget simply shows you your inflows and outflows over a defined period. Having this knowledge will allow you to make financial planning decisions that will affect you out into retirement. The most important thing when thinking about formulating and committing to a budget is to keep it SIMPLE. Don’t force yourself to learn Microsoft Excel in order to track expenses (unless you want to), paper and pencil is fine. The key to all financial planning is to do what works for you. We all know ourselves, what we will stick to and what works for us.

A personal budget is done for a defined period, generally one year. Going out beyond that just makes it more complex. Because you have to make assumptions for the outer years, your budget loses accuracy.

When I was younger, I was afraid to do a budget for fear of it defining what I couldn’t have. Now, looking back, it was just a way to avoid the obvious. After all, as long as I didn’t know what my restraints were I couldn’t be deprived of whatever it was that I didn’t even know I needed. I was on my way to becoming the poster child for the consumption oriented society we have become over the past 50 years. Fortunately, my grandmother saved me.

My grandmother was a wise budgeter. Whatever weekly cash wages Grandpa and she brought home went into three different cookie jars that were on top of the tallest kitchen cabinet. The first jar was for loan payments (in their case, the mortgage), the second was for food, fuel, phone and electricity and the last was for whatever else was needed. This methodology could be replicated in a spreadsheet or by depositing money into different accounts. The secret to Grandma’s budget process was that once the jar was empty, nothing else could be purchased.Screen Shot 2016-08-16 at 1.36.17 PM

In some ways, Grandma was lucky in that there were no credit cards, so there was no option to get overextended. The magic to her process was that she prioritized her bills – Jar #1 had the “no option but to pay” stuff, Jar #2 was the “if you want to eat, stay warm and survive stuff” and Jar #3 was for everything else. When my grandparents needed furniture or some other large ticket item, they would put it on lay-away. For those too young to remember, lay away entailed making weekly or monthly payments to the store until a purchase was paid for. You did not take the item until it was fully paid.

Today in our “consumption and instant gratification” mode we have gone to the opposite extreme. We need to find a way to come back to the middle. Finding a way to budget that works for you is the most important way to find that happy medium.

To start a budget you need to figure out what you bring in and what you spend every month. Over a period of one month, you will need to do the following:

  1.  If you are receiving a steady paycheck, it is pretty easy to tell what is coming in. Other income may include alimony or interest and dividends, if fairly consistent. If you are self-employed, or your income is more seasonal, there is an added challenge, but you will be the best judge of how to spread it out over the budget period.
  2. For tracking expenses, some people use their debit or credit card to pay for everything. This is one way to have all the expenditures in one place to start making out the budget. Others cash their paycheck and use a notebook to track what they spend everything on.

Expenses for the most part tend to be monthly. This includes mortgage payment or rent, electricity, phone, fuel, car expenses, insurance and food (obviously not an all-inclusive list). The idea for a budget is to come up with income and expense categories that make sense to you so that you will consistently fill in the same expense in the same place each month.

So how to start? You can use a spreadsheet or put down by hand all the categories on the left column and then all the months across the top. Something like the one below.

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Once you have the “Income less Expense” figure, you will know if you need to cut back or save more. Be honest with your expenditures. Don’t let feeling guilty about certain expenditures stop you from completing the process. The point is to make educated choices on where we are spending our hard-earned money.

The most important thing to remember is that it is YOUR budget so the categories may be different (housing may be broken out into Heat, Electrical, Water, Sewer, Tax), and the way you track it can be different – it has to work for you. Keep it simple; don’t get bogged down in making it perfect the first time. Over time, your budget will evolve and continually improve, helping you make informed decisions in your financial life.

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