Things to Consider When Budgeting

Proper budgeting helps you reach long-term financial goals.
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Preparing a household budget is often a painful process, but it's probably a necessity if you have any hope of setting money aside to reach your financial goals. Budgeting requires careful consideration of a variety of factors, including your income, expenses and spending patterns. While you'll likely need to make some short-term sacrifices, you'll reap the financial rewards over the long run.


A primary purpose of budgeting is to help you reach your financial goals, such as saving for the downpayment on a home or putting money away for a comfortable retirement. Having a measurable goal helps you determine precisely how much fat you need to trim from your budget. Laurie Campbell, program manager at Credit Counseling Service of Toronto, suggests using visual images to serve as motivation to help you maintain budgeting discipline, such as placing pictures of that dream home on your refrigerator.


For budgeting to be effective, you need to identify all your expenses so that you have an accurate view of how you're spending your money. Divide you expenses into four categories: housing, work, living and personal. After listing your monthly expenses for each category, you can then determine which ones are fixed, and which ones are more discretionary in nature. Your discretionary expenses, which are more likely to be found in the living and personal categories, should provide the greatest opportunities for making spending cuts.


When assessing your income for budgeting purposes, only take into consideration your current and guaranteed income and avoid speculation about the future. While you may have received a sizable Christmas bonus for the last three or four years, there's no certainty the practice will continue. Consider any financial windfalls you receive as "found money" and don't include them in your budget plan. You can always apply the extra money toward your financial goals to help you reach them even faster.

Spending Habits

One major benefit of preparing a budget is that it forces you to examine your spending habits so that you can make necessary corrections. If you think you will have difficulty controlling your spending even after creating a budget, consider implementing the "10 percent solution" for saving money. Set aside 10 percent of each paycheck to devote to saving and investing and use the rest to cover expenses. Check with your employer to see if the 10 percent can be automatically deposited into a savings vehicle, such as a 401k plan.

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