Budgeting for Personal Expenses

Anyone who sets up a personal financial budget usually is well aware of the importance of accounting for personal expenses.

However, recognizing the need to scrupulously account for all expenditures during the reporting period that you choose (monthly, for most people), and actually doing it for long enough to do much good, can be two different matters. Unless you are the type of person who really enjoys recordkeeping and working with figures, the process of budgeting for expenses can be difficult and tedious. Although it may be hard to believe at first, the time you spend preparing and maintaining your personal budget can yield real financial gains.

The process of budgeting for expenditures may be broken down into several steps, which are outlined below.

Forecast your expenditures. The best way to do this is to look at your checkbook and credit card statements for the last six months or so, and see how much you spent each month in various categories of expenses such as savings, housing, utilities, phone, car payments, gas & transportation, insurance, clothing, gifts, entertainment, and whatever other categories make sense for your life.

When thinking about your expenditures, remember to include those infrequent payments that can really set up back if you aren't prepared. For example, car insurance payments may only come due once or twice a year, but you should have budgeted for them by setting aside an amount to cover them. Similarly, if you live in an area where seasonal heating and cooling costs can vary widely, make sure that you budget appropriately for heating in the winter and cooling in the summer. Basing the amount you spend each month on electricity on your usage in February will prove disasterous when you run your air-conditioning every day during August.

When forecasting your expenditures, don't forget to account for out-of-pocket, cash expenses. If you don't know precisely how much you spend this way, you can start by penciling in an estimated figure. Then, keep track of your cash expenditures for a month, perhaps by writing them down in a small notebook or on the back of your ATM receipts. Once you get to the point that you know the actual amount spent, you can replace the estimated amounts with the "real" figures. You may be shocked at how much money dribbles through your fingers this way.

Track your expenses. During the budget period (usually one month,) keep records of each expense and compare your actual expenses for each category with what you budgeted for that category. Even if money budgeted for one purpose is not spent on that, there's a real temptation to spend it for another purpose.

Make adjustments. For categories where the budgeted amounts don't match your actual expenditures, you'll need to make adjustments. When it turns out that you have paid more (or less) for an item than the amount you had budgeted, you will, of course, want to adjust the amount of the estimated budget expense to agree with the amount you actually paid. But, this may not be all that is required -- other budgeted items (in either the current or later budgets) may have to be changed.

If the expense is more than budgeted amount, you may want to consider one or more of the following tactics:

• Decrease amounts budgeted for other items, in the current, and future budget periods if the situation isn't a one-time event.
• Increase income, in the current or future budget periods.
• Do nothing, and let the change to the "bottom line" for the current budget (the amount of decreased cash or increased deficit) be carried over to the next budget.

It's ill-advised to use the last strategy unless the over-spending was a one-time event. For example, a one-time event would be if your dog was injured and there were unexpected vet bills in the month, as opposed to a regular monthly expense of dog grooming. Unlike governmental units, salaried employees or business owners and their families normally can't run budget deficits for any great length of time. If your personal budget shows you to be running a deficit, you'll usually need to quickly bring in more cash flow (by increasing income, tapping savings, or obtaining loans) or, more likely, to decrease spending on other budget items.

If you spent less than budgeted amount, whether you acquired the budgeted item for less than the budgeted amount, or the expenditure was not made at all, you may want to:

• Increase amounts budgeted for other items, either in the current or future budgets.
• Increase the amount that you are saving or investing.
• Do nothing, and let the change to the "bottom line" for the current budget (the amount of increased cash or decreased deficit) be carried over to the next budget.

If it turns out that you're spending less than your income, congratulations! You're among a very select group of Americans. We usually recommend that you try to save at least half of the excess cash, for those other times when you might have more expenses than you forecasted.