When you're getting used to budgeting for the first time, it's helpful to know how to manage and stay within your budget.
- First and most importantly, allow yourself to be flexible. If you want to spend more on groceries one month because you're having a party or craving something gourmet, there's nothing wrong with that. Just spend less in another area to compensate. Don't expect to always stick within the amounts that you set for yourself as guidelines when you first created your budget.
Next, make sure to leave room in your budget for some fun things. Maybe your budget is so tight that the most fun you can afford are the ingredients to make some chocolate chip cookies, but at least allow yourself that. Or maybe you're in a better situation financially and the choice is between saving 12% for retirement one month or buying a concert ticket and still saving 10%. You should reward yourself. For most people, lifestyle tends to inflate when income goes up. This isn't inherently a bad thing as long as you are still meeting your financial goals and obligations. After all, if you reward yourself the same way on a $7.50 an hour wage or a $75,000 a year salary, where's the incentive to work harder? If you don't reward yourself, it will be emotionally difficult to stick to your budget in the long run.
- Always make sure, however, to keep spending below your income. Special events like Christmas should also fit into your income. Rather than pile the gift purchases onto your credit card in December, buy gifts throughout the year or save a little each month to make the holiday affordable. (To learn how to budget for the holidays, read Keep Holiday Debt From Snowballing.)
- Don't go into debt for things that are not long-term investments (long-term investments being a house or an education that you can reasonably afford). Consumer debt will strike a major blow to your finances. When you finance a car, for example, not only does the asset depreciate every year, cost money to maintain and eventually become obsolete, you're also losing money on interest every month. (For more insight on consumer debt, see Digging Out of Personal Debt.)
- If you don't have enough cash on hand every month no matter what, or if you tend to spend money you know you should be saving, consider adjusting your withholding. To do this, you'll need to fill out a new W-4 form and give it to your employer. If you want, you can even download and print the form yourself from the IRS website.
One reason you have taxes withheld from each paycheck is that if you haven't paid at least 90% of your tax liability by the end of the year, you'll have to pay a penalty. The W-4 instructions are designed to get you in above this threshold. However, if you normally have little or no tax liability in April, you may be able to claim fewer allowances and get more of your pay monthly instead of waiting for a refund in April.
- Conversely, if you have more than enough money to meet your monthly obligations, but any extra money tends to burn a hole in your pocket, you can increase your allowances, essentially allowing the government to save your money for you. Then, you'll get a bigger refund in April. You can even have the IRS deposit your refund directly into the account of your choice, like a savings account, eliminating all temptation for you to spend it.
- Likewise, if your employer offers direct deposit, you may be able to deposit a portion of your paycheck directly into a savings account. If you already have sufficient cash reserves, you could also improve your savings rate by increasing the amount of your paycheck that goes directly into your retirement account. Again, these options will put a portion of your money automatically out of sight and out of mind.
- Rent: You don't have to wait until the first of the month to pay your rent. If you comfortably have the money in your account earlier and think you might spend it, just send in your check early.
- Mortgage: If you're a homeowner, making an extra payment toward your principal when you can afford it will shorten the life of your loan and the amount of interest you'll ultimately pay. This tactic may not be terribly rewarding in the short-term, but you'll thank yourself for it down the road.
- Utilities: Switching to compact fluorescent bulbs, especially in the lights you use most, will dramatically reduce the lighting component of your electric bill. Keeping your thermostat slightly lower in the winter and slightly higher in the summer than what you'd optimally like will reduce your heating and cooling costs, and you'll probably get used to it after a few days. Using ceiling fans and wearing more or less clothing are a lot less expensive than using more energy.
- Clothing: The deepest discounts are generally available at end-of-season sales. The rest of the time, you can save money by getting a store credit card that offers cash back rewards or coupons (make sure to pay off the card in full and on time every month or you won't come out ahead), signing up for store email lists to get special coupons, and buying gift cards at a discount on eBay (Nasdaq:EBAY).
- Groceries: Many of us have stockpiles of food in the freezer and pantry that we've seen so many times, we've forgotten they're there. Determine how to incorporate these items into your meals and you'll get a break on the cost of groceries while you clean out your closet.
- Transportation: Plan errands so that you don't make multiple trips. Go to the grocery store on the way home from work, or do all your errands for the week on Saturday morning. As an added bonus, you'll save time in addition to money and gas.
Budgeting Basics - Goal Setting
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