Budgeting has a bad rap. Too many of the people who give budget advice are detail people and/or control freaks. They make you think that if you don't record every taco and pair of panty hose, you're on the road to financial ruin.
You don't have to track every penny to have an effective financial plan. The secret is setting priorities. Pay yourself first, then pay your bills, then you can blow what's left with a clear conscience.
You will have to sit down and look at what you're earning and what you owe each month. It helps to write all this down somewhere. If you like computers, a program like Intuit's (NASDAQ:INTU) Quicken or Microsoft's (NASDAQ:MSFT) Money can be very helpful, but a pencil and paper will also do the trick.
First, figure out exactly how much money is coming in. Then pay yourself first by putting at least 10% of your pretax earnings into savings. More is better. Now, look at your bills. Write 'em all down. Include estimates for necessities like food, gas, dry cleaning, etc. Subtract your savings and your expenses from your after-tax income. What's left is "discretionary" cash -- money you can spend as you like.
It won't be enough.
It never is.
Get used to it.
If your discretionary cash really isn't enough to cover lunches, clothes, groceries, haircuts, and video rentals, you have two choices. The first is to just go ahead and buy what you need and/or want using credit cards to bridge the gap. This is a surprisingly popular choice, given that it leads to misery, divorce, and embarrassing phone calls from creditors just a few short years down the road. (If you're already in this situation, visit our Credit Center for solutions.)
The second choice is to adjust your expenses. You may have to track your discretionary spending for a few months just to get a handle on it, but if you view that as a temporary fact-finding mission, it's not so bad. Once you see where the money is going, it's easier to decide where to cut.
If you are going to use this somewhat loose budget plan successfully, you have to be rigorous about two things: 1) Know how much discretionary cash you have to spend each week (or month), and 2) don't spend more. People used to eat nothing but beans when the grocery money ran out before the end of the month. People used to save up until they could afford a vacation or a new suit. Despite the best efforts of the credit card industry to convince us that we deserve everything immediately, some people still wait. It still works.
For ideas on where to keep your discretionary cash, visit our Savings Center. And for the very exciting (sorta) Bit-by-Bit Budget, check out The Motley Fool Personal Finance Workbook.
