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In my very first post I talked about the advantages of using a credit card with rewards for everyday purchases. Recently, a frugal fan sent me a link to a great online tool to help people chose the best cash back reward card. One need only input their annual expenditures into each category and decide whether to use multiple cards to maximize the rebate or a single card for convenience. For those that are running a budget, this exercise should be easy. For those that do not have a budget, it’s time to start! 

Most people think of a budget as a means of constraining their spending and associate it with a general loss of fun. It is considered to be on par with such wonderful past times as filing taxes, balancing a checkbook, and paying bills ( oh happy, happy, joy, joy). But me thinks the ol’ budget has gotten a bad rap. A budget is really nothing more than a blueprint to turn inadvertent spending into planned expenditures. The first step to taking control of one’s finances and heading toward financial freedom is to make spending less impulsive and more intentional.   

Keeping a budget can actually be quite liberating. Haven’t we all felt guilty at one point in our lives for purchasing things we don’t really need? With a budget, that guilt is turned into careful consideration as the thought process changes from ”do I really need this”, to which the answer is almost always a resounding “no”, to “how much do I really want this over that” (do i want the neon hot pants or the leopard print bathrobe this month?). And who says that having a budget means no fun? I think all budgets should include an Entertaintment & Recreation section because all work and no play leads to…well, bad stuff. 

There are a variety of different ways to run a budget. For those that are old school (circa 1985), there are plenty of budget templates to print off to track one’s spending with a trusty pen and Trapper Keeper. For those that have decided to join the new millennium, there are a couple “fancier” ways to run a budget. I personally have been running my budget in an excel spreadsheet and have been verbally abused by the “cool kids” with the spiffy software packages (i.e. Quicken and Microsoft Money). Not to be outdone, I recently signed up for a FREE online budgeting program at Mint, which appears to have many of the benefits of the software packages (daily downloads from linked bank accounts, credit cards, brokerage accounts, etc.) without the fee (would you expect anything else from Frugal Franco?). I can’t vouch for it yet, but it looks very promising. 

Whatever the choice of venue is for running a budget, always remember to give it time. A budget isn’t born overnight and most will need to be customized over the first 3-4 months as spending habits become more apparent. As a side note, if you’re a budget newbie, I’ll bet the Food (eating out & groceries) section gets grossly underestimated the first couple months. Make sure to put some padding in the Food category and see my previous post on how to save money on groceries.

The best strategy for an effective budget is to start with a bottom up approach and then cross check it with a top down view…let me explain. First create several distinct categories, which will vary depending on each person’s lifestyle and spending habits. As an example, my categories are Transportation, Food, Home, Entertainment, Dog, Vacation, Gifts, & Extras (a catch all, slush fund). After the categories have been nailed down, try to estimate how much is spent on each per month. As I mentioned earlier, this will most likely be a moving target the first couple months. Once the monthly allotment has been made, add up the total monthly expenditures and multiply by 12. The total annual expenditures should be less than one’s annual net income, which is what is left after taxes, withholdings, savings (Frugal Franco recommends a MINIMUM 10% of the gross income for savings), and charitable gifts (let’s face it…there are plenty of people who need money more than we do) have been taken out. If the annual expenditures are too high, start from the top and work down by shaving off some dollars in a couple categories.

Of all the things I’ve written about, this is by far the most powerful money saving tip. To get a better understanding of the magnitude of these savings, check out some of the savings and budgeting calculators American Expess provides online. Lastly, I apologize for the lack of communication over the last couple weeks, but I have been completely enthralled with the Olympics. Since I no longer feel obligated to “keep up” with my DVR (digital video recorder…aka Poor Man’s Tivo), my time should be coming back to me in spades.

Ciao,
Franco

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