Living Within Your Means: How to Develop a Realistic Budget

By: Jay Delgado

Developing a realistic budget is the first step to financial freedom. Notice I said realistic, I am not talking about a standard itemized budget here where you say I pay this much on the house and this much on the electric and so on. A budget that only includes your standard monthly expenses just is not realistic. Why not? Because you spend a lot more money than you think on things that you do not even consider in your budget.

When was the last time you sat down and worked out your budget? Did it look good on paper? Was it hard for you to figure out why you were broke when you should have $1,000 or more in expendable income each month? What is happening to that income? You are spending it without even realizing it.

In order to develop a realistic budget, I want you to do a couple of things. Take out a sheet of paper or open a spreadsheet. Enter your standard monthly expenses such as your house payment, car payment, utility bills, insurance bills, credit card payments, etc. Do not forget extras such as groceries and gasoline. While you are at it, take a stab at how much you are spending in entertainment and impulse purchases. Now put everything away and do not look at it for a month.

What you are going to look at for a month is a spending journal. Go purchase an inexpensive notebook. Each time you make a purchase, no matter how small, record it in the notebook. I am talking about everything here: coffee, lunches, dinners out, money that you hand over to the kids, etc. Write down the date you spent the money, how much you spent and describe what you bought.

At the end of the month, bring out your standard budget and your journal and compare them. I bet you spent a lot more money than you had budgeted for, did you? It is amazing how things that you do not even consider add up. Just think: If you buy a $2 coffee every morning on your way to work, you would spend $40 a month on coffee. And that is not including the occasional donut that you sneak here and there.

Now it is time to get realistic. The key to formulating an accurate budget is to merge these two budgets. Take a look at what you really spend and figure out where you can cut costs. Maybe you could purchase a self-timed coffee pot and grab a cup before you leave the house. Maybe you could let the kids rent movies and have their friends over rather than go out to the theater. Do not be afraid to get creative.

Keep in mind that you can only budget and save where it is reasonable. Do not try to do away with items that you do not want to live without. Instead, shave away expenses. Instead of eating out twice a week, why not try twice a month? Instead of doing away with cable completely, why not scale back on subscription channels? You get the idea.

The key to developing a realistic budget is to be honest and reasonable. Be sure to include all of your expenses, even the ones that are easy to forget about.

Money Management
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