This is where it all starts. You need a process to track your money. Imagine a company that didn’t track revenue or expenses. How would you know how they’re doing? Or, imagine watching Sunday football where they didn’t keep score. It’s far less interesting. The same holds true for your money. It’s impossible to execute the SmartPath system (or any financial plan) without an active budget.

Everyone has a different, unique way of budgeting. Budgets that succeed are more about the person doing them (you) versus the actual method. I’ve seen people budget on napkins and save more than those using high-tech web tools. Why, because their budget is part of their everyday life. They interact with it daily, update it, use it to make decisions, reflect on it, revise it, cuddle with it and love it. OK, I probably went a little too far with the last few but I promise that if you give your budget attention, it will work wonders for you.

Here are a few tips for effective budgeting: ### Creating a Budget * **Keep it Simple:** The best budgets are simple. Figure out the tool that works for you and get started. Set a 1-month budget with three columns: Budget Amount, Actual Amount and Remaining. Write down all your projected income and expenses for the month. Make sure your budget shows you are spending less than you make. If not, fix it. Don’t overcomplicate this step. Your budget will be wrong. It’s how you adjust during the month that’s important. * **Cash Entry:** Budget for random cash. Don’t assume that you’ll remember where you spent the cash and then apply it to that category. Cash has a funny way of being incognito. You can’t remember what you did with it. Make your life easier. Have a line in your budget that reads, “CASH”, put a number next to it and stick to that number. No late night trips to the ATM. * **5% Rule:** Your budget will be wrong. Plan for it. Put a line in your budget that reads “Miscellaneous” and enter 5% of expenses. If you’re spending $3,000/month, your miscellaneous should be $150. Yes, you will need to reduce other areas but the miscellaneous column will be your best friend as you work through the month. * **25% Rule:** If your income is unpredictable (e.g., sales/commission jobs), use the 25% rule to calculate your estimated income. Use your income for your highest and lowest months to calculate your budgeted income. Here’s the equation: Budgeted Income = Lowest + (.25\*(Highest – Lowest)). Let’s look at an example. Assume you earned $5,000 after tax in your best month and $3,000 after tax in your worst month. Your estimated income for your budget will be $3,500: $3,000 + (.25\*($5,000-$3,000) = **$3,500**. If you make more than $3,500 in the month, apply it to your next SmartGoal. * **One-Offs and Irregular Expenses:** Admit it, you have ‘one-off’ expenses every month. You also have expenses that occur every few months and they always seem to screw up your budget. Make a list of the one-off and irregular expenses for the year. Car registration, insurance, oil changes, tickets, etc. Take the total cost and divide by 12 so you know how much you need to budget each month. For example, if you have $3,600 in one-off expenses, you need to budget $300/month ($3,600/12). The money will build in your checking account and then use it for the one-off expenses as they come. * **Track Future Expenses:** You need new bed sheets. It’s not in the budget. It’s not an emergency. You’re pissed. Log it as a ‘Future Item’. Create a running list of things you need and how much they cost. Each month, when you create your budget, look at the list and decide what you can put into the budget. Buying the sheets may mean one fewer night going out. Your choice. A ‘Future Items’ list softens the blow of not getting the sheets when you want them. You know you will get them later when you can sacrifice another expense. ### Using Your Budget * **Log Daily:** Your budget is alive. Water it daily. Create a set time each day that you log expenses and make adjustments. It usually takes 3-5 minutes. The more days you go without tending to your budget, the more likely it will die. * **Fix Overages Immediately:** If you go over your budget in a category, don’t get frustrated. Simply find a category where you have money remaining and reduce it. For example, if you go over your ‘Eating Out’ budget by $50, find a category where you still have money and reduce it by $50. Remember, your goal is to spend less than you make. Where you spend is less relevant. * **Reimbursements:** If you’re getting the money back, it‘s income. When you buy an item and expect to be reimbursed (by anyone), log the purchase as an expense and put the same amount as income. If I buy a $10 movie ticket and my sister is paying me back, I log $10 in ‘Reimbursed Expenses’ and $10 in ‘Reimbursed Income’. * **Returns:** If you return an item, log it as a negative in that category. For example, assume you budgeted $100 for ‘Clothes’. You bought a shirt for $30. Your budget now shows $70 remaining. You return the shirt. You log (-$30) in ‘Clothes’. You’re now back to $100 remaining. * **WalMart Rule:** You spend $125 at WalMart. The bill has groceries, clothes, household items, pet food, etc. It’s just about everything. Get the receipt and split the expenses based on the categories in your budget. It will take a few extra minutes but will save a hours of frustration. Remember, the best budgets are part of the family. Consider them a big brother. They’re not there to ruin your fun. Instead, they keep you on track so you can have fun for a long time. It generally takes a few months to perfect your budgeting process. Try online tools, pen/paper, excel or even the envelope system and see what works for you. Most importantly, remember that budgeting simply helps you spend less than you make. Don’t overcomplicate it.

11 Rules For Effective Budgeting

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