Budgeting

                                            Budgeting 101

The first and most important step to effective financial planning is developing and implementing a budget. That, of course, sounds easy and even simplistic. But it's more difficult than it seems. Budgeting simply means to live within one’s financial means.

Needs vs. Wants
You have a limited amount of money to spend each month, so you need to separate your needs from your wants.  Your "needs" usually include housing, utilities, food and clothing --- the things you can't live without. Once your needs are taken care of, any remaining money can go to unnecessary “wants” --- those items that are nice to have, but not required to live.  They usually include things like cable TV, Internet service, restaurant meals, cell phones with many features, etc.
You need to be careful not to confuse wants and needs. A very common reason people get into serious debt is by failing to live within their means. They use credit to supplement their wants, but eventually this will cause financial trouble. For example, you need a place to live, but you don't need a 3,000-square-foot home. A home is a need, but the four bedroom home with a finished basement and a swimming pool is a want.

Developing A Budget

The first step in setting up a budget is to determine the amount of your monthly income. When you mention “income,” most people think of what they earn from their job. However, it is important to include all sources of income. Include all income, including things like babysitting, child support, tips, etc.
After listing all of your sources of income, document the net amount you receive from each source. Net income is the amount of money you receive after taxes and other deductions (health and life insurance, 401k contributions, etc.). Net income is different from gross income, which is the amount you earn prior to those deductions. Base your budget off your net income because this is the amount of money that you realistically have available to spend.
Your next step is to write down all of your major expenses and subtract them from your net income. Examples of major expenses include a mortgage or rent payment, auto payment, insurance premiums, and utilities. These payments are generally fixed, and you are expected to pay them every month. Some major expenses, such as insurance, can be paid periodically. For these expenses, it is wise to divide the amount of the expense over several months.  (For example, a quarterly payment would be divided over 3 months.) Set aside money each month for the periodic expenses and pay them when they become due.
Setting Realistic Goals
After subtracting your major expenses from your net income, you will hopefully have money left for other important items such as groceries, gasoline, and credit cards. The first time you set up a budget, it may be hard to determine how much you will spend on groceries or gas each month. Try your best to estimate these amounts for the first month. As the month goes on, track your expenditures to monitor the accuracy of your estimates. After you have a more realistic idea of your expenses, you can update your budget
You’ll probably be surprised at the amount of money that’s spent on unnecessary items. It’s important to allocate your available funds to cover your high priority bills first. To decrease spending, try to not allocate as many dollars for unnecessary items such as entertainment. For example, if you’ve been spending $100 per month on dining out, only allocate $50 in your budget. After you’ve spent your allocated amount, don’t spend any more in that category. It takes discipline, but it’s well worth it. The money that you save can go toward paying down the principal of your debts, or into a savings or investment account.
It will be difficult at first, but most behavioral changes aren't easy. You’re changing your mindset and attitude toward your money, and that takes time. But the longer you do it, the easier it becomes. It won’t be too long before your budget has become your habit. Remember the adage – learn to live within your means.
Tracking Expenses
Tracking expenses is a key aspect of maintaining the budget that you have created. If you do not track your expenses, there is no way of knowing whether or not you are staying within the budget you have established. For example, you may have allotted $150 for groceries this month, but if you do not track your expenses carefully, you may never notice if you spend $225 over the course of a month. Spending more than the budgeted amount in one area will necessitate that you decrease spending in another area. The only other option is borrowing and credit, and that can be expensive if used frequently. Tracking expenses will also help you to see where your money is going. If you are not aware of how much money you spend on dining out, or gasoline, or groceries, you will certainly know after you spend a month carefully tracking your expenses.
There are several easy ways to track expenses. The most basic tracking method involves writing down all of your expenses in a notebook on a daily basis. If you choose to track your expenses in a notebook, it is important that you carry the notebook everywhere you go. Otherwise, you may forget to record an expense. When you’re documenting everything, it may be easier to categorize your spending - food, utilities, entertainment, gas, charity, etc. 
Another tracking technique involves saving receipts for purchases and documenting that information in a notebook or on your computer. Many people now pay bills online – your payment history is an easy way to quickly review your monthly spending. Keep in mind that you may spend money on items for which you are not given a receipt, such as a donation to a co-worker’s birthday gift. For this reason, it would be wise to continue to carry a notebook to write down miscellaneous expenses.
If you use a debit card regularly, you may benefit from monitoring your debit card statements. Most banks have websites that allow you to view all of your checking account transactions.
If you like to use a computer, you may consider tracking expenses using a software program. Some programs can even be linked to your bank accounts, which allows for immediate expense updates. No matter what program you choose to use, it's critical that you enter your expenses on a regular basis.