Monday, September 9, 2013

Reader Request: Budgeting Tools

A quick Google search will bring up all kinds of advice on how to start budgeting if one has not yet started. Another search will display hundreds of free budgeting tools. Sometimes all this information can be overwhelming, so in response to a reader's email about a simple way to start a budget, here are the tools and steps I took when I had no idea how to begin budgeting. I actually still go through these steps now and then to help keep me on track.

The free tool I like the best is from the Australian government, and can be found here. What I like about this one is how simple it is to use while also being rather complete in the items one needs to include. There are a couple places one may find herself including a bill in a category that is meant for something else, but I find that this is the case with all the budgeting tools I've tried.

To get started on a new budget, I suggest first entering every bit of information one can about her current spending habits. Do not round up: try to be as close to correct as possible. If one rounds up, when she gets the end result she will assume it is not as bad as it looks, so being as correct as possible is important. Also, one will need to decide if she should enter the information for only her side of the household expenses, or if it makes more sense to include her partner's income and responsibilities. If the credit card interest rate is unknown, the average is currently about 15% in the U.S., so one can use this to guess if she cannot find her exact interest rate.

Once this has all been entered, the result may be a wake up call. And it should be! Is that not the reason we are trying out a budgeting tool in the first place? So do not despair -- this is just the first step in moving toward a more responsible budget.

The next thing I did was note the breakdown I was given, and start again, this time only entering my income and the financial obligations I cannot avoid. Housing, transportation, student loans, credit card payments, utilities, phone, healthcare, insurance, and a reasonable supermarket budget where included, but hairdresser, gifts, going out, and vacations were not. The reason I did this was to see just how much of first number was frivolous spending on my part, and how much I really need to live on.

Seeing the difference in these two numbers was important for me; it allowed me to easily see where I can cut back. So after noting the difference, I added all my other non-essential expenses back in, cutting each by an amount I know is realistic, until I got to a final number I found acceptable. I think it is better to start realistically with these cuts and later trim down again so that the budget changes are smaller, and therefore more likely to stick. It won't be much of a help to make drastic changes for a few weeks only to go overboard when one realizes she cannot stick to quite that austere a plan.

In theory, the difference between the first number and the final number should be applied to savings and to any outstanding loans. If there are no outstanding loans, then it all gets to go into one's savings. But of course, one needs to actually live! So the full amount will not be applied, but one should use this number to see how far off track she is from where her finances could be each year.

Starting a new budget is not difficult -- the tricky part is sticking to it. But as long as one makes realistic cuts and stays aware of those new limitations, she should be able to make the changes that result in a healthy financial lifestyle.

1 comment:

  1. Hi Kate :)

    Great post about budgeting. You might want to include .
    Pocketbook makes personal finance ridiculously simple. And best of all - it's free.

    See your financial transactions in the one place
    Stay on top of your bills
    Minimise bank fees and late payment penalties
    Keep you on track of your budgets and savings goals


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