Categories

Content Type

Sources

Spending: Put Your Budget on a Diet

By Laura Cohn, Source: Your Money Kiplinger

As the holiday season winds down, you might want to add to your New Year's resolutions not only to cut back on the calories, but to put your household spending on a diet, too.

The first step is to track your spending; a personalized Excel spreadsheet, the free budget worksheet at Kiplinger.com (kiplinger.com/tools/budget), and online budgeting sites such as Wesabe.com and Mint.com are all excellent tools. Once you know where you're leaking money, you can set priorities and savings goals and reroute your cash. Ideally, you'll adhere to the golden rule of budgeting: Pay yourself first. But you also need to avoid borrowing back the money you save to meet expenses.

The more targeted your goals, the more likely you are to achieve them. Put away money specifically for retirement, college or a house -- or maybe squirrel away cash to renovate your kitchen. As a Mint user, you can let the program set up your budget by tracking what you actually spend, or you can manually create budgets for categories such as groceries and eating out. A new tool on Mint called "projected savings" can help you see how long it will take to reach your goals.

One thing you should always do when setting up a budget is put aside money for an emergency. Even when the economy's firing on all cylinders, you need "just in case" money for an unexpected medical expense, furnace failure or fender bender.

As you start to follow your budget, be sure to give yourself some wiggle room. Budgets are meant to be flexible. If you restrict yourself too much, you may get so frustrated that you splurge on a big impulse buy -- the dieter's equivalent of cheating with a banana split. Jean Keener, a financial planner in Keller, Texas, notes that most people can afford to have one area that qualifies as a luxury, such as a nice home.

The good news is that most people overspend in just two or three areas. Suzannah Garrison, a 42-year-old single mom, started using Mint.com after her investments lost 40 percent in the bear market. Once Garrison analyzed her outlays, she was surprised to find that she was spending much more than she realized on household items -- including home-cleaning services, repairs and furniture -- as well as on eating out. Garrison cut back what she spends on her home -- from $2,500 a month to less than $1,000. She also reduced her dining-out budget by a third, to $400 a month.

Now that we think of it, maybe you shouldn't think of a budget as a diet after all. It's more like exercise. Any pain you feel will only make you stronger.

(Laura Cohn is an associate editor at Kiplinger's Personal Finance magazine. Send your questions and comments to moneypower@kiplinger.com. Visit www.kiplinger.com for additional advice and features.)