Budgeting 101

Image of The New Frugality: How to Consume Less, Save More, and Live Better
Author: Chris Farrell
Publisher: Bloomsbury Press (2009)
Binding: Hardcover, 240 pages

Question: Can you recommend a book on how to put yourself on a budget? My mother has supported my 45-year-old sister and her two children for a number of years. She has told my sister that when she graduates from college in 2013 and gets a job, she will no longer give her any money. I am afraid my sister will have no idea how to manage her money. My mother has been supporting them in a lifestyle that my sister will not be able to afford. I suggested to my mother that she use this last year of support to teach my sister how to manage money. Thank you, Elizabeth, Unionville, PA 

Answer:  I do have a couple of recommendations. I think you're absolutely right to suggest that your mom start reducing her support. Before I list a couple of books, here's my perspective on budgeting.  

It's simply a way to gain control over money. A budget helps us stop spending more than we're earning. The payoff from a budget is that you end up spending your money where you want, and you save for what you would like to do (as well as a safety net in an emergency). For a relatively small investment in time and effort, a budget has the potential to support a lifetime of good financial habits.

What goes into a budget? Everything. The classic budget template converts expenses into monthly numbers. For example, if you pay $600 annually for life insurance, divide that figure by 12 to get $50. Similarly, if you spend $150 a week on food, multiply it by 4 to get $600. There are a number of excellent budget templates on the web. Here's one from the Consumer Credit Counseling Service of San Francisco. Many banks and credit unions offer budget tools on their websites, too.

It's important for your sister to come up with a system that's comfortable for her. An approach to money that does wonders for you or your neighbor may not be suited to her temperament and circumstances. For instance, I tried and failed several times at maintaining a budget on software programs. Too boring. Too time-consuming. I learned it was far easier for me to use a pen, a notebook and a calculator.

That is, until the latest generation of online budget programs came out. I like them. For example, Mint.com is a well-known online monitoring tool (you can only read the data, you can't transfer money around) that facilitates budgeting. I use the budget management tool offered by my online bank. By the way, it's fine if she prefers monitoring spending with an old-fashioned notebook and pencil, making simple additions and subtractions on a cheap calculator. It's more than adequate in most circumstances.

Your sister should also know that budgeting is a tool, not a goal. She shouldn't have to track her spending data over the years. Instead, the budget is a way of making the transition toward living within her means -- a lifetime of good financial habits. Ballpark figures and estimates are fine after that for most people.

Of course, we know it's hard to stick with a budget at the early stages of the exercise. Our intentions are good, but life interferes and old habits reemerge. First of all, if that happens to your sister, she should cut herself some slack. She shouldn't try to do everything at once. It's a journey, not a destination. One way to stay on task is to enlist the support of family and friends. When we talk about something we're trying to accomplish with people we care about, we're more likely to follow through. I also believe in automating as much of her savings and spending as possible, as I wrote in this article for Kiplinger's.    

Time is a scarce commodity these days. The only way to succeed at saving more is by making it a priority. Push other worthwhile goals aside for the moment. 

We use various mental tricks to save, such as leaving the credit card at home in the freezer, paying for everyday expenses with cash, and steering clear of expensive restaurants. We set up budgets by using Quicken, Mint.com, or a simple notebook. Yet the simplest, most effective way to turn your savings priority into reality is to automate your savings. ... You can do the same thing with your checking account, whether it's $10, $25, $50, or $100 every month. The money won't look like much at first, but it will grow over time. 

Here are my three book recommendations. Check them out and see if you think one of them will be useful. Ruth Hayden's How To Turn Your Money Life Around: The Money Book for Women, is excellent on budgeting. She also deals with the bigger questions of changing money habits. So does Eric Tyson in Mind Over Money. I have a section on budgeting and an approach to money geared toward establishing a margin of safety in my book, The New Frugality. Good luck.

About the author

Chris Farrell is the economics editor of Marketplace Money.
Image of The New Frugality: How to Consume Less, Save More, and Live Better
Author: Chris Farrell
Publisher: Bloomsbury Press (2009)
Binding: Hardcover, 240 pages

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