Creating a Personal Budget and Sticking to It

Jun 19, 2013

**Editor’s Note: **Guest blogger David Bakke is a small business owner and freelance writer for the popular personal finance resource, Money Crashers.

If you're struggling to get a handle on your finances, a budget may be your best tool for finally taking control of them. This can be especially helpful for freelancers with fluctuating incomes. If you've never created a budget before, however, it can be a challenge – if you don't set it up properly from the start, sticking to it is virtually impossible. To make a personal budget that's right for you, follow these tips:

1. Use an Online Service

Online services like BudgetTracker, PearBudget, and Billster help you keep a handle on your expenses and even allow you to link your bank accounts to service providers to streamline the payment process. Mint is also a reliable website that offers budgeting assistance, bill payment reminders, and goal-setting strategies. The initial set-up may be time-consuming, but once all the pieces are in place your finances are going to function like a well oiled machine.

2. Do It Yourself

Online budgeting software is highly effective, but if you're new to the world of budgeting, you may be more suited to a traditional approach. By creating your budget manually, you may be able to get a clearer understanding of how your finances work on a monthly basis, and be better able to spot areas that need to be addressed. Create an Excel spreadsheet if you're comfortable in that format, or use a pen and paper if you prefer. The format doesn't matter; what matters is that your budget communicates to you in clear and efficient way what you earn and what you are able to spend.

3. List All Income and Expenses

Regardless of which method you ultimately go with, the first step in creating a budget is to list your income and monthly expenses. For freelancers trying to estimate income, the key is to err on the side of caution and list the low end of what you might earn in any particular month. By doing this, you’ll ensure that a miscalculation means that you exceeded expectations. The expense section, however, can be a bit trickier. In addition to all your monthly bills, you should include prorated annual expenses such as auto insurance and property taxes. And don't forget about the little expenses. Those stops at the convenience store for a newspaper or the local café for a cup of coffee all add up at the end of the month. You don't want to look at your budget and wonder what went wrong.

4. Identify Ways to Save

Next, you want to research the many ways you can reduce expenses. Is that coworking membership necessary? Can you make coffee while you work from home instead of buying a $4 latte? Bundle your cable TV, internet, and cell phone service to get a reduced rate. Get a home audit from your energy provider to find ways to save. Sometimes, adjusting your thermostat by just three degrees in either direction can result in a 20% savings. Go through your monthly expenses line-by-line and ask yourself if you're paying rock bottom prices for everything. If not, roll up your sleeves and find a better deal - trust me, it's out there.

5. Set Goals

The best way to stick to your budget is to set achievable goals. If you've got $10,000 of credit card debt, for example, you're not going to dig yourself out overnight. Try putting $500 per month toward your debts, which can get you to a $3,000 reduction in six months. When you meet your goals, reward your frugality with a modest treat. If you don't allow yourself the occasional dinner out or retail purchase, you may rebel against your budget and scrap the whole thing.

6. Review It Regularly

Review your budget on a regular basis and make adjustments as necessary. If gas prices just went up by 30 cents, your monthly payout for fuel could rise by $30 or more depending upon how much you drive. Make sure your budget accurately reflects your monthly expenses so you know when you have to scale back in other areas.

Final Thoughts

Once you start seeing a budget surplus, make sure you put it to good use. Depending on your situation, this may mean putting money toward credit card debt, investing in your small business, or starting a 529 college savings fund for your kids. Remember, your budget is of little significance if you don't apply the fruits of your labor to strengthening your overall financial health.