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Budgeting: A Critical Step on the Path to Financial Security

By Motley Fool Staff – Aug 19, 2015 at 12:20PM

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Budgeting doesn't have to be painful, and it can help you save a lot of money.


Photo: StockMonkeys.com.

If you want to get ahead financially -- to be out of debt and with a growing retirement nest egg -- you need to have a handle on where your money is going. Budgeting is a vital tool on the path to financial security, as it can help you see where your money is going, and can help you develop better spending patterns.

A critical part of being debt-free and building wealth is living below your means. It's hard to do that, though, without knowing just what your means permit. Enter budgets.

How to create a budget
Essentially, budgeting involves getting a picture of all your cash inflows and outflows. You'll want to get a picture of how things look now, and develop another of how you want things to look.

Start with a piece of paper, a fresh online document, or a new spreadsheet page. List all your cash inflows. This is usually the simplest part, especially if you only collect income through your salary.

But think a little harder. You might also have some dividend income, alimony income, gift income, or extra income from another activity, such as yard sales, a hobby, or part-time job. Add all that together to see how much money you have coming in.

Now to the cash outflows, which are trickier. To figure out where all your money goes, you'll need to track every dollar you spend every day. Do this throughout the day as you're spending, and if you can keep it up for a month, it will give you a pretty reliable picture of your everyday spending.

Get your calculator out and start adding up your expenditures. Photo: Alan Cleaver, Flickr.

A month won't give you the whole picture, though, because many expenses occur infrequently. So dig through a year's worth of credit card statements -- you may be able to access them online if you no longer have the paper statements -- and checks that you wrote. This way, you'll be able to include monthly, quarterly, and annual expenses such as utility bills, insurance bills, membership dues, subscription expenses, and so on.

Here's a list of spending categories that you might want to use and perhaps add to if you have other significant kinds of expenses:

  • Rent or mortgage
  • Groceries and household necessities (toilet paper, detergent, etc.)
  • Eating out
  • Utilities (water, gas, electricity, garbage, sewer, etc.)
  • Transportation (car, maintenance, repairs, gas, public transportation costs, parking, etc.)
  • Taxes (property, income, etc.)
  • Telephone and communication
  • Debt repayments (car loans, student loans, etc.)
  • Travel (airfare, hotels, etc.)
  • Clothing
  • Savings
  • Insurance (home, health, car, disability, life, etc.)
  • Entertainment and recreation (TV, streaming services, Internet, season tickets, etc.)
  • Health (doctor visits, glasses, gym memberships, etc.)
  • Charitable donations
  • Education (school fees, tuition, textbooks, courses, etc.)
  • Child-related expenses (summer camp costs, tutors, tuba lessons, etc.)
  • Pet care
  • Miscellany

Photo: Got Credit.

How to use a budget
Once you figure out exactly where your money is going, you'll be looking at your current budget, good or bad. Even if you've been managing your money well, there are probably some adjustments you might find that you want to make. It will help if you jot down what you would like to see in your ideal budget, in terms of savings for retirement, college expenses, and so on.

If you're currently saving some money, perhaps through a 401(k) plan at work, but want to sock away $5,000 more per year, your budget can help. Divide the $5,000 by 12 to see how much more you want to save each month: $417. Now you can start designing a budget that meets your needs.

Study each expense, and ask yourself how important it is. For example, if you're spending $175 each month for cable TV, Internet service, and a landline phone, think about how much you really need those services. You might be able to let the landline go, and just use your cell phone. You might not miss cable TV's offerings if you find enough to watch through the many streaming services available.

When tracking your expenses, you might even come across some items that are completely wasteful, such as a $35-per-month gym membership you never use. If you can let that go, you'll save $420 per year.

Give each item careful thought. Car insurance may not be optional, but a little shopping around might save you a lot of money. If you're paying for life insurance but no longer have anyone depending on your income -- perhaps your kids are grown -- you might let that go. You will, of course, want to keep your brokerage accounts or other financial accounts, but you might want to move to a different bank or brokerage to save money on fees and commissions.

By examining your spending, and deciding how much you want to spend or can afford to spend on various categories, you can probably find the savings you need.

Better living through technology
The budgeting process can be made easier through the use of budgeting apps for your smartphone. Here are some that have received good reviews: Mint, Home Budget, Spendbook, You Need a Budget, Wally, BillGuard, Level Money, Mvelopes, Spendee, and Goodbudget. It can actually be fun to view and play around with the data collected.

Budgeting doesn't have to be painful, and it can help you save money and secure a more comfortable financial future. Give it a whirl.

This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors based in the Foolsaurus. Pop on over there to learn more about our Wiki and how you can be involved in helping the world invest, better! If you see any issues with this page, please email us at [email protected]. Thanks -- and Fool on!

Longtime Fool specialist Selena Maranjian, whom you can follow on Twitter, has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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