Why You Need a Personal Budget

By Curt Smothers

Evaluate your finances

Do you have more and more month left at the end of your money? Are you using your credit card to buy things that in the past you paid cash for? When that credit card bill comes each month, do you only pay the minimum required?

If the answers to those questions are "yes," you are heading for big trouble, and need to stop and take stock of your finances. You can call that process "personal budgeting" if you wish; it is really "personal rescue before it is too late." 

If you are heading for or are currently in financial straits, it is time to do the equivalent of whacking yourself upside the head and honestly evaluating your job, your lifestyle, income, prospects for increasing your income, and where you are right now.

Keeping track of what you spend

Let's look at the "right now." If you're spending more money than you make, you need to stop and evaluate what is happening and why. It sounds ridiculous, I know, but some people don't bother to keep track of what they spend either through their check book or credit card. It is easy to loose track with a credit card, but there is scant excuse for not balancing one's checking account.

Dump the credit cards!

Which leads me to my first recommendation of digging yourself out of financial trouble: Get rid of your credit card(s)! Those interest rates (as high as 30% in some cases) are wrecking your finances. Stop using those cards now! Find a way to consolidate that credit card debt, lower the payment, and you've taken the first step towards getting well financially.

Go the direct deposit route

If you're not already doing this, have your paycheck sent to a bank that will allow you to pay bills on line. This will be a positive step in controlling your spending and keeping good records on what's going out.

Keep a formal budget or live below your means?

There are two schools of thought on keeping an actual personal (e.g., written) budget. One approach encourages the formal practice of writing down what you earn, what your known bills and expenditures are each month, and what you have left over for discretionary spending or savings. 

The formal approach includes keeping a written record to see how faithful you are to the plan. The other simple method is living below your means. That means never spending more than you earn each month and having money set aside for those inevitable emergencies.

First, go the formal route

I subscribe, in the beginning at least, to the formal method. Do it once, and it might be an eye opener. Stick with it for a couple of months and see if you can maintain the discipline and not overspend.

There are some rules of thumb in budgeting. 

If you are spending more than 25% of your income on rent or house payments, you are living beyond your means. Another example is dining out frequently, or shopping at upscale stores.

How about that car your driving? Are you paying $500 car payments that are eating another hole in your monthly check? Were you aware that experts recommend you have at least the equivalent of six months' income in your savings?

Make a spreadsheet budget

If you're pretty handy with a computer, try entering your first budget in a spreadsheet. The handy "what-if" scenarios that affect your bottom line are easily and instantly seen using this method. Personally, I keep track of my budget and spending using Quicken’s  Money software.

Whichever method you use, even if it's simply pencil and paper, don't forget to write down the taxes that are being deducted from your paycheck each month. You might be surprised to learn that you can pay less taxes each month. Of course, your refund next April will be less, but it is your money and you need it now.

Make some important decisions on your spending

After you've gotten a handle on how much you're spending as opposed to how much you earn, you need to make some decisions: Is your "non-discretionary" spending (the bills you have no control over) the cause of your financial problems? Are housing, transportation, monthly bills, property taxes, etc., preventing your ever solving your financial woes? If so, you've got some hard choices facing you. Those choices may be as difficult (and basic) as lowering your standard of living.

You can control your discretionary spending

Fortunately, most people have the income to support their bills, because our lifestyle tends to level towards our income. It's the discretionary, or sometimes emergency, spending that busts the budget. Look for savings in areas where you once may have either ignored or have been extravagant.

There may be some difficult sacrifices involved in cutting down on the simple pleasures of life that cost money, but compare the price of weekly trip to a restaurant with drinks and a movie to a frozen pizza at home with a six-pack of beer. Toss in a rented video, and you've already saved about $60!

So, here's the bottom line: If you are spending more than you are earning, you cannot continue. Decide on making lifestyle changes that could lower yoru non-discretinary spending. Toss those credit cards, and run your own numbers. Make a simple budget that will be a useful tool and will help you get control of your life.