Budget System

Start your way with an effective budget management. Without a budget you can't start investing, simply because you don't know how much you can invest.

The quickest way to start on your way to keeping an effective budget is to start tracking how you currently spend your money - no matter the amount. You may need to record every single expense from an ATM withdrawal to the quarter for the paper.

This is a good starting point to figure out your limits for each budget category. Allocating how much to spend for each category is one of the hardest tasks in your budget management, but you’ll be surprised to find out that you tend to spend less when you track how much you spend – and even be delighted at how quickly it adds up.

W. Patrick Naylor's book, “10 Steps to Financial Success” (New York: John Wiley & Sons, 1997), an excellent beginner's guide to saving and investing, suggests that you can record your daily expenditures for a two-three month trial period, so that you can work out an average expenditure each month. You can then establish what your disposable income is (the difference between your income and expenses). Naylor also says it's a good idea to keep a copy of the budgets you've written in the past, so that you can refer back to them and monitor your ability to spend within those estimates.

Also, see how much money you can reasonably expect to have saved by the end of the year, and adding on the interest that you can make from this money.

Organise and automate your banking. With increased functionality and useability of online banking, it is becoming much easier to manage your savings and investments online. Naylor says you should establish two separate bank accounts - one for income and expenditures and one for investments - and you should link the two accounts.

Suggested Budget Management System. The following percentages will give you good rule of thumb for what you should be spending as a percentage of your income on some of the major budget categories:

   35% - Housing -- Spend no more than 35% of net income on housing. That includes mortgage or rent, utilities, insurance, taxes and home maintenance.

   20% - Transportation -- Spend no more than 20% of net income on transportation. That includes car payments, auto insurance, tag or license, maintenance, gasoline and parking.

   15% - Debt -- Spend no more than 15% of net income on all consumer debt: student loans, retail installments contracts, credit cards, personal loans, tax debts and medical debts.

   10% - Savings -- Save at least 10% of income throughout your working life

   20% - Other -- Spend no more than 20% of net income on all other expenses: food, clothing, entertainment, child care, medical expenses, tithing and charity.

This is a clear picture of how you may want to spend your money – in the best sense, reduce spending. Stop any spending leaks you have in your budget and start using that money for investments. It takes a lot of discipline but it matters when you want to reach your financial goals.

Help: One of the best ways of overcoming the normal challenge that people face when trying to keep a budget is to learn how to use a personal financial management tool such as Quicken or Microsoft Money. These tools make everything you do concerning your personal finances easier, and quite frankly, make it a lot more fun. It's hard to imagine budgeting being fun, but these tools actually do make it more enjoyable.

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