Many people think of budgeting as something to do when they're short on cash. College students might turn to a budget to figure out how to make do with their high expenses and limited incomes. Smart new grads create budgets to make sure they're properly allocating their first paychecks among emergency savings, retirement savings, student loan repayments, rent and utilities, and rewards for their hard work like new gadgets and nights on the town.

Young couples trying to figure out how to afford a wedding, or newlyweds wondering how to fit the expense of buying a house or having a child into their monthly cash flow, are also likely to make budgets. Retirees make budgets when they realize that their income will never be as high again as it was while they were working. Budgets are commonly associated with people of all ages who are barely able to make ends meet.

The truth is that budgeting isn't just for times when your money is tight or your life is undergoing a major transition. Budgeting is for everyone, rich and poor alike. In fact, budgeting will be that much easier in times of change if you do it all the time. Where do you think a Fortune 500 company like Amazon.com Inc. (AMZN) would be today without proper budgeting? What about wealthy people like Warren Buffett? There's no way that he or his holding company, Berkshire Hathaway Inc. (BKR.B), could have achieved such success without paying attention to their monthly, quarterly and annual cash inflow and outflow. Budgeting won't just get you out of a rut – it can also help you get rich.

Make Long- and Short-Term Projections

A budget will help you plan for short-term expenses like your monthly bills, mid-term expenses like vacations, as well as long-term expenses like buying a house, paying for a child's college education and putting money away for retirement.

When you have a spreadsheet or notebook in front of you showing how much money you expect to make over the next few months (or years), how much of that money goes out every month and how much you have left to save each month, you'll always know when you need to cut back on spending, when you can afford to loosen the reins and how long it will take to save for major goals.

If you're not happy with the numbers, knowing what they are will help you take steps to improve your situation, whether that means focusing on paying off credit cards to increase your monthly cash flow, or getting a promotion or switching companies so you can make enough money to afford everything you need and want.

Prevent a Crisis

Let's say a significant expense arises unexpectedly: maybe you develop a serious toothache and your dentist informs you that you'll need a root canal and a crown. While you may have have dental insurance through work, you're still going to have to fork over at least $500 out-of-pocket to get the work done. How can a budget help you handle an expense like this? If you're new to budgeting and don't have any emergency savings yet, or if your savings have already been depleted by another recent emergency, your budget will help you determine what expenses you might be able to postpone or shift around to help you pay the unexpected bill.

Plan for Major Changes

As mentioned earlier, a budget lets you model in advance how a major purchase or life change will affect your finances. Instead of wondering if you can afford a house or panicking about whether you and your spouse can afford to live on one income while the other stays home to raise a child, you'll have the data you need to crunch the numbers. You'll find out before you make any change whether you can afford it and what sacrifices you might need to make.

Methods of Budgeting

There are several different ways that you can create and maintain a budget, and you may have to try a couple of different methods to find out which one is right for you.

  • Notebook and Pen: The cheapest option, one that doesn’t require a computer. You can easily carry it with you and access it at any time, and electronic failure won't cause you to lose your data. However, notebooks can be misplaced and meticulous record keeping can be ruined by the swift tip of a nearby glass of water. Perhaps most importantly, it's easier to make mistakes by hand, and it's more difficult to track your long-term spending and savings patterns with a notebook.
  • Spreadsheet: If you have a computer, chances are it came with Microsoft Excel. If it didn't, you can download Open Office to get a free spreadsheet program that's compatible with Excel. If you use a spreadsheet to track your income and expenses, you're less likely to make mistakes, and you can easily do calculations such as how much you spent on groceries for the entire year. In addition, a spreadsheet can keep a running total of how much money you have left to spend in a particular month that adjusts every time you enter a new expense into your spreadsheet.
  • Financial Software, such as Quicken and Microsoft Money: The obvious drawback of these programs is that they cost money and may need to be periodically upgraded (for a fee), particularly if you get a new computer with a new operating system. However, they can do much more than a spreadsheet, such as keep track of all of your bank and investment accounts for you. But if your computer gets stolen or hacked, then all of your personal information will be compromised.
  • Online Software: The newest financial planning tool, some of these programs are free and have as many features as paid programs, and you can access them from anywhere. Of course, any online system can be exploited by hackers. However, if you're just using it to calculate the running balances for your savings and grocery, bills and other expenses, it might be a nice tool to have.

​Keep Track of Every Expense, Including the Small Ones

It's easy to remember how much you spent on rent or your mortgage payment, but for other expenses, you'll want to save your receipts. If that drives you crazy, put all your purchases on the same debit or credit card to make record keeping easy. Keep in mind, though, that the transaction descriptions on your credit card statement aren't always crystal clear, and you may be left wondering about that unlabeled $19.17 purchase.

Also remember that you may be charged for each transaction, and if you don't pay off your credit card on time, you'll be accruing interest as well. Another option is to use cash for the small expenses, but only withdraw a certain amount each week or month and enter this in your budget as "miscellaneous." While this method may prevent you from overspending, it will not give you the clearest picture of where your money is going.

Update Your Budget Daily

Tracking your money this way will take minimal time, and you'll be less likely to forget something. (Many of the computer and online programs do this automatically.)

Use Accurate Descriptions

Write down your expenses by what they are rather than where you purchased them so you'll be able to figure out later how much you spend in particular categories. For example, if you shop at a big box store like Walmart Stores Inc. (WMT) or Target Corp. (TGT), you might make a purchase that includes groceries, clothing and household cleaning supplies. If you list the purchase under "Walmart," you won't really know where that $150 went.

Budget by the Month, Not the Paycheck

This forces you to think slightly longer-term than your bimonthly paycheck, but not so long-term that you're likely to get derailed. Also, you'll get a fresh start every month. If you have a bad month, it's in the past after 30 days. If you have high expenses one month, you can look forward to the following month when, for example, your car insurance isn't due.

Plan for Both Fixed and Variable Expenses

Fixed expenses are items like rent and health insurance, and variable expenses are things like utilities and gas. Some costs, like groceries, can fall into either category depending on how much self-control you have.

Plan for Occasional Expenses

Remember to budget for expenses that only happen a few times a year like gifts, car insurance and doctor visits. If you have enough room in your budget, you can pay for these as they occur. If you're on a tighter budget, set aside additional savings ahead of time. There is no excuse for going into debt because you didn't realize that Christmas happens every year or that you would need a bridesmaid dress or a tux when your best friend gets married a year from now. Your budget can be more or less detailed depending on your level of self control. Can entertainment be grouped under miscellaneous, or do you tend to spend so much on movies, restaurants and concerts that this needs to be its own category?

The Bottom Line

Budgeting is a little different if you have a steady income versus an irregular one. If you're paid hourly or on commission, are self-employed, work seasonally or are a student, you probably won't know how much you're going to make until the month is over. Irregular pay makes budgeting a little trickier, but it's still feasible. You will still have to cover certain expenses no matter what, and if you've been in the same line of work for a while, you probably have a good idea of the minimum amount of money you're likely to make. Budget around that minimum and you might be pleasantly surprised at the end of the month if you make more.

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