Operating without a personal budget increases the chances of getting into financial trouble, because you're receiving and spending money with no idea where it's going or if you even have enough to meet expenses. Setting a budget is required to get a handle on income and expenses. While setting a household budget takes work and vigilance, it's not difficult once you develop some positive habits.
A budget can be as plain or fancy as you want it to be. You can keep it on a sheet of paper, in a ledger book, on a spreadsheet or online. Computer tools may automate the process, although they'll require a learning curve and are better for maintaining the budget than creating one. Most budgets are best designed in longhand with a pencil and eraser.
Thorough Record Keeping
A good budget depends on solid numbers to make it realistic. If you have a handle on what you actually spend in each budget category, you will be able to apply more useful numbers in building a spending plan. This is crucial before you even set a budget. To collect this data, chart all of your income and expenses for a month -- including things like small cash transactions at a convenience store.
Basic Math Skills
Setting a budget requires mostly addition and subtraction, by hand or with a calculator; no advanced math is necessary. Once your transaction tracking gives you numbers you can work with, the process involves little more than adding your expenses together and subtracting them from your income. Even breaking your budget down into categories -- housing, rent, gas, utilities -- requires only basic math.
Planning Skills and Flexibility
Setting a budget allows you to decide ahead of time where each dollar goes; you can interpret your numbers and plan your expenses. Good planning involves enough flexibility to cover your usual monthly expenses and the occasional bills, such as car insurance, and gives you enough wiggle room to meet most emergencies. While your household budget may stay the same month to month, you can adjust it according to need or any change in your income or spending habits.
Some budget items carry more importance than others, and budgeting requires establishing priorities. While food is not optional, you must separate the needs from the wants even in this category if you're operating on a tight budget or want to build up your savings by cutting spending. Opting for generic brands and eliminating convenience food purchases saves some money, but your preferences may overrule this. The decision to set aside an emergency fund means you are putting the future ahead of today's impulse buying. Your priorities are your own, but they set the tone for your budget.
Diplomacy and Communications Skills
If you share a budget with a spouse or partner, all interested parties need to discuss household finances and agree on priorities. You can negotiate differences with enough compromise to keep everyone happy and in the loop. For your budget to work, however, everyone needs to agree that income should always exceed expenses.
Discipline and Perseverance
It takes time and patience to build and maintain a budget, and the benefits may not seem apparent right away. Tracking all purchases and staying within the budget requires discipline and the ability to stick with it.
- University of Massachusetts: Money Management and Personal Finance
- University of California-San Diego: Financial Management
- Skills Toolbox: Basic Personal Budgeting
- Federal Trade Commission. "Making a Budget." Accessed April 1, 2020.
- Bank of America. "How to Prioritize Your Savings Goals." Accessed April 1, 2020.
- Bank of America. "5 Reasons Your Budget Isn’t Working." Accessed April 1, 2020.
- Bank of America. "8 Simple Ways to Save Money." Accessed April 1, 2020.
- Consumer Financial Protection Bureau. "What Is a Certificate of Deposit (CD)?" Accessed April 1, 2020.
- Experian. "Can You Pause Your Credit Card?" Accessed April 1, 2020.
- Chime. "How to Make a Budget: A Guide to Choosing the Right Budgeting Style." Accessed April 1, 2020.
- University of Kansas. "Section 1. Planning and Writing an Annual Budget." Accessed April 1, 2020.
Al Bondigas is an award-winning newspaperman who started writing professionally in 1985. His print credits include the "Mohave Valley Daily News" and "The Mohave County Standard." Bondigas studied journalism at San Bernardino Valley College in California.