Budgeting as a Financial Tool

Budgeting is simply a means of planning and tracking your expenses so you know where and how you are spending your money. You can use a budget to track expenses on a short-term basis, typically for a month, but you can also use a budget to help you plan for long-term goals, such as retirement or saving for your kids' education. Your budget should be in writing or prepared with the help of budgeting computer software.

To prepare a monthly budget, begin by making a list of all your regular expenses, such as food, mortgage or rent, car payments, clothing and entertainment. Determine how much you spend on each area. If you don't know approximate amounts for some items, look through old credit card and bank account statements to get an idea, or make your best estimate. Total up your expenses, and subtract the amount from your net monthly income to see how much (if any) money you have left over at the end of the month.

If you're shocked by how little money you actually have left over or you're just not happy with the amount, it's time to get the scissors out (not literally) and do a little cutting. Divide your expenses into those that are fixed and unavoidable, such as housing and utilities, and those that are more flexible, such as entertainment and gym memberships. Analyze the latter group to determine which of those items you can reduce spending on or even eliminate completely. You may be surprised at how much extra money you've found.

Now you're ready to see how budgeting can be such a powerful financial tool. With all that additional money you now have at the end of each month, you can start an investment program, save money for a down payment on your first home or put it into your 401(k) plan at work. In the long run, you'll reap the rewards that solid budgeting provides. The key is stick to your budget once it's established and avoid falling back into your old free-spending ways.