The road to financial hell is paved with good intentions -- including budgets. It’s not enough to create a solid budget, even if it’s completely accurate and takes into account all your financial goals. A budget is only as good as your ability to stick to it, and misinterpreting part of it, not updating it regularly or not keeping track of it monthly can lead you down the road to financial peril. Tracking small discretionary expenses is the best way to make sure your budget accurately reflects your spending and stay on track with your financial goals.
Build a Good Budget Document
The first step to following a budget is to create an accurate budget document. Do this by using last year’s bank and credit card statements, checkbook, taxes and other financial records to accurately estimate this year’s expenses. List your expenses in two sections: fixed and variable. Fixed expenses don’t change, such as rent or a car payment. Variable expenses like groceries change each month. After you put together your first budget draft, adjust your variable expense estimates to meet your financial goals. Financial expert Dave Ramsey recommends that you overbudget for groceries, because this is an area where many people err when setting out their budgets.
Record Savings as Expenses
Prevent yourself from spending excess cash you see building in your bank account by recording savings items as expenses in your budget. For example, if you plan on saving for a home down payment by putting away $500 per month, add that as an expense item in your budget. When you see $6,000 extra cash in your bank account later during the year, your budget will remind you that $5,500 of that is “untouchable” home down payment money.
Use Several Formulas
Don’t just total your expense categories. Average your monthly expenses and project your annual numbers using different formulas. To see if you are meeting your monthly goals, create an “Average Monthly” column that divides your total spending in each category by the number of months that have occurred. Multiply your “Average Monthly” number by 12 in a “Projected Annual” column to see where you will be at the end of the year if you keep spending at your current levels.
Record Small Expenses
You can’t follow a budget that doesn’t tell you the truth. If you spend $7 for lunch, record that in your budget. If you go to the movies and spend $33, record that in your budget. These small discretionary purchases eat up thousands of dollars of your annual income, and many people don’t realize why they can’t meet their budget goals. The best way to follow a budget is to acknowledge all of your spending so you can see what’s really happening with your money.
Enter Expenses Accurately
Be careful not to double-record expenses you pay with a credit card. If you put your $400 car payment on your credit card, record it as an expense in the month it occurs. If you pay that $400 off your credit card later, don’t record that payment, since you already recorded it in the month you were billed. This can be tricky if you carry a balance from year to year and requires you to keep track of how much of your monthly credit card payments during the year go to last year’s balance and how much goes to reduce this year’s purchases. Record monthly credit card interest as an expense if you want to track your net worth, or leave it out it if you simply want to use your budget to manage your monthly cash flow.
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