Chapter 1: How to Make a Budget and Stick to It
Chapter 2: Creating Personal Budget Goals
Chapter 3: Assessing Your Current Financial Situation
Chapter 4: Identifying Budget Focus Areas
Chapter 5: Staying Committed to Your Budget
Chapter 6: Budget Software
The assessment of your current financial state tells you exactly what you are doing right and where you are going wrong. Now comes the task of determining the areas that your budget should focus on. For example, if you are regularly spending hugely on leisure activities, your budget should limit the expenditure in this area to a reasonable amount.
Different people have different ideas and perspectives and what you think is important or essential may be inconsequential to another. Avoid following another person’s lead in determining where you need to curb or expand spending.
Another point to remember when determining focus areas is that your budget is a pathway to achieving specific financial goals. Any expenditure that helps you progress towards these goals is a productive one.
Remember that it is impossible and also unnecessary to budget every dollar you spend. Doing so will only make budgeting a tedious and difficult process to sustain. A rule of thumb is to make a conscious decision about spending when the expense is over $20.
Now that you have your assessment ready, you can begin charting out the various targets of your budget program.
Avoid at All Costs Category
Identify areas where you think spending is excessive and completely avoidable- movies, eating out, credit card outstanding interest, payment on loan that does not build essential asset etc. These go under the ‘Avoid at all costs’ category.
These are areas where you need to eliminate spending. It may not happen over night in all these cases, but it will, in time, provided you consistently work at it. At all costs, avoid incurring these expenses again once you have them out of your expense sheet.
Can Cut Costs Category
Identify areas where you think you can cut or modify spending though they are essential areas. For example, you can get a cheaper mortgage loan through refinancing. Use a car pool instead of driving to work. Use one car instead of two.
The Untouchables Category
These are areas that are critical to your life and should not be touched or subject to budget restraints – education, groceries, electricity, medicines etc. There will be many expenses in this category that are necessary for you to maintain a reasonable lifestyle. No matter how badly off you are, it is possible to plan your finances through proper budgeting so that these expenses are not touched and yet you regain control of your financial life.
Now that you know the focus areas or goals for your budget, you need to set targets/ milestones for each. These milestones must be reasonable and achievable, as otherwise the entire purpose of establishing a sustainable financial plan through budgeting is lost.
Within expense areas, prioritize those that are responsible for continuously increasing debt. For example, addressing credit card outstanding should be a priority area. Aim at bringing credit card dues to zero in 3 months.
This goal will require that there is some savings from other areas that can be diverted here. To do this, aim at cutting down entertainment to $20 from $100 this month. The saving goes directly into your ‘credit card fund’. In this way, each of your priority ‘expenditure control’ areas can dovetail into each other to give you even greater benefits.