by Raven Lebeau

Created on: February 05, 2010

Creating and staying within a budget is an important part of meeting your savings goals, but many households find that sticking with a budget is not trivial. Budgeting requires a careful plan, realistic expectations, and a set of strategies for balancing wants with needs. Here are a few tips for making your budget work for you:

1. Compartmentalize.

While your overall budget is the most important, it is also helpful to create individual budgets for things like food, entertainment, clothing, and other expenses.

2. Be sure your budget includes everything.

Before creating your budget, you will need to have estimates of all of your expenses including weekly expenses like food and gas, monthly expenses like utilities and mortgage payments, and yearly expenses like car taxes or homeowners' dues.

A smart budget will also include a reasonable amount for unpredictable expenses like medical bills or repair bills. To plan for these expenses, find out the amount of the deductible on your health insurance and auto insurance policies. Also take into account the average cost of home repairs for a house the same age and type as yours. Consider the replacement cost of important appliances such as your washer and water heater. Incorporate these unpredictable expenses into your budget by creating a savings account that can cover you in a financial emergency.

3. Be realistic.

If you were spending $200/week on your household's groceries, then budgeting $100/week is not realistic. Instead of setting strict, arbitrary spending limits, think of concrete ways you can cut your spending and base your budget on those concrete changes. For example, if you know that you can save $5.00/week by switching from upscale coffee to store brand coffee, then it makes sense to lower your food budget to $195/week, but only if this is a change you are honestly willing to make.

4. Stay flexible.

Your budget will need to change with inflation, income changes, and price changes. For example, if a change in the weather forces you to increase your budget for utilities, you may be able compensate by cutting back on another aspect of your overall budget such as clothing or entertainment.

5. Avoid “all or nothing” thinking.

Being unable to stay under budget is not a sign of financial failure or a reason to give up on your savings goals. Never use the fact that you are already over budget as an excuse to spend even more money. Instead, try to stay as close to your budget as possible, and look for ways to avoid ending up over budget in the future. You may need to look for additional ways to cut costs or adjust your budget so that it allows for natural fluctuations in your expenses. Finding a budget that works for your household is an ongoing process that will involve trial and error.

6. Have a plan for your budget surpluses.

Ideally, living on a budget will help you live a more frugal lifestyle and start making saving a habit. As you adjust your spending patterns, you may find that you come in under budget more often than not. It may be tempting to spend that “extra” money, but you are more likely to put it to good use if you have a plan in place. For example, you could invest it or put it in a special savings account. You could also take a moderate approach and use some of the extra money for a night out while putting the rest in savings. They money you save during the times you were under budget can help you during hard times when your budget is not enough.

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