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Once you have tracked your spending for 30 days, you need to divide it into categories. There is one list available that has more than 90 budget categories. But this could be serious overkill especially if you're just beginning to budget. A better idea is to start with just major categories and then add others as you learn more about your spending habits. Here’s a “starter” list of budget categories.
• MORTGAGE OR RENT
o Homeowners/Renters Insurance (actual amount paid)
o Water and Sewer
o Natural Gas or Oil
o Telephone (Land Line, Cell)
o Eating Out, Lunches, Snacks
• FAMILY OBLIGATIONS
o Child Support/Alimony
o Day Care, Babysitting
• HEALTH AND MEDICAL
• DEBT PAYMENTS
You may want to eventually divide some of these general categories into more specific ones. For example, you might want to divide transportation into gas, repairs and auto insurance. But for most people, these categories would be a good place to start.
Where to make cuts
Of course, the purpose of budgeting is not just to see where your money is going but where you can make cuts – to save money or to just get your spending under control. To do this you will need to carefully review all your categories to see where you can reduce your spending. If you find that you're spending more than you earn, your first goal should be to reduce your spending to the point where your expenses are less than your earnings. To do this you will need to carefully review each category looking for linkages – places where you can make cuts. Most people find that the easiest categories to reduce spending are food, entertainment, clothing and eating out.
Sticking to that budget
Once you have created a budget, you're halfway home. But now comes the part that might be even more difficult, which is sticking to it. You will need to continue tracking your spending to make sure you're not exceeding any of your budget categories. Some people can do this by putting all of their spending on credit cards. However, this does require a fair amount of self-discipline. One alternative to this is to use what’s called the envelope system of budgeting. Here's a short video that teaches the system.
The joy of budgeting
As you can see, budgeting takes time, effort and some amount of self-discipline. But don't think of budgeting just as a straitjacket or a nasty task that you must perform over and over. Instead, keep focused on the benefits of budgeting. For example, if you’re struggling with debt budgeting can help you get it under control and ultimately paid off. You can also use budgeting to build up an emergency fund equivalent to six months' earnings so that you’ll have enough money to weather just about any financial emergency without having to create debt. Plus, budgeting can help you fund your retirement. It's become increasingly clear over the past few years that counting on Social Security to fund your golden years could be a big mistake. You need to be saving money for your retirement, which is almost impossible to do unless you’re budgeting.
In short, budgeting can be a great tool for improving your life now and even 30 years in the future.