How to Establish a Realistic Budget

Include All Expenses

Your budget should account for all the money that you spend, not just the big categories or the ones that you have on a consistent basis. Danny Payne, a certified financial planner practicing in Southern California says that, "miscellaneous expenses, such as gifts or entertainment, can often be underestimated due to their somewhat unforeseen nature." For example, you might not think much of picking up dinner for your brother's birthday, drinks to celebrate your buddy's new job, or a contribution to a coworker to help with medical bills for a sick child, but together, those costs can really add up. If you haven't budgeted for them, you can find yourself short at the end of the month. As you go forward, tracking how much you spend on average on these types of expenses can help you better budget for them in the future.

Budget Money for Long-Term Expenses

It's easy to overlook items that only hit your bank account sporadically, such as that new computer you bought, your car insurance payments or saving for a new car or home purchase. "Annual expenses or less than annual expenses (like a car purchase) can be forgotten about," notes Payne. "Think long-term and convert expected long-term expenses to a monthly budgeted expense that is allocated to a savings account." For example, if you pay $300 per quarter for car insurance, your monthly budget should include $100 for it -- even if you aren't paying that bill that month.

Gather Spending Data

Ideally, it's good to have spending data from the previous several months before you make your first budget to help make sure it's realistic. However, that's not always possible. What you can control, however, is tracking your spending going forward. "The old days of tracking receipts is a tedious process that is difficult for many to maintain," says Payne. If you're not too keen on keeping every receipt, using software to monitor your spending habits can save you time and keep better track of your spending. Of course, you still have to remember to put in your cash purchases to keep your budget accurate.

Be Prepared to Adapt Your Expectations

It's rare that anyone is able to pick up a new task and do it perfectly the first time, and the same applies to making a budget. This is particularly true when you simply don't have past spending records to know how much you're actually spending, so don't be discouraged if your actual spending varies from what you've initially budgeted. "For a first effort budget, don't be too restrictive," advises Payne. "Set realistic budgeting goals and revise from month to month as you gain a greater familiarity with spending habits."

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