When many people think about budgets they only think in terms of trying to keep their spending down and maybe save a few dollars for a rainy day. But budgets aren’t just about controlling your spending, they’re about creating a master plan for your spending and your financial life.

Leveraged correctly, a personal budget can help you achieve your financial goals and help you create a powerful strategy for getting the most out of your money.

Fear of Budgets

Before we delve into the details, it’s important to address the fear of budgets that is so common especially in people who are struggling financially. The most common fears that people have of budgets are:

Fear that they are poor. 
Many people don’t want to take a close look at their income, expenses, and debts because they are afraid that they will discover that they truly are destitute. By ignoring the details of their budget, they can continue on in the fantasy that they are doing okay financially.

Fear of disaster.
Even people who are obviously sinking financially will avoid budgeting because they fear that they will see impending disaster on the horizon. On some level, they believe that if they just look away, the impact of financial disaster won’t be so bad.

Fear of embarrassment. 
Most people don’t want to be shamed for their financial mistakes so they avoid budgeting and they also avoid reaching out to personal finance professionals or even bankruptcy attorneys. They fear that others will judge them for their financial mistakes so they prefer to avoid the problem altogether.

If you share these kinds of fears, the underlying belief that you are alone in your financial troubles is probably fueling it. The truth is that everyone, even the most financially successful today, has made mistakes, some of them foolish and careless. Making financial mistakes doesn’t make you any less intelligent or unworthy, it just makes you human like everyone else. So with that in mind, let’s look a little closer at how you can master your personal budget.

Purpose of Budgets

Budgets aren’t just about watching every penny, they are about creating a spending plan that will keep you on track for reaching your financial goals. Creating a spending plan sounds a lot less scary than creating a budget because it’s about taking your money and putting it to some use for your life. When you have an effective spending plan, you can see whether you will have enough money for your expenses and other goals months or even years in advance. And if you’re in debt, creating a smart spending plan will help you determine not only how much you will pay on debts each month but how long it will take you to get out of debt. And sometimes your spending plan will let you know clearly that there is no way to get out of debt without some type of debt settlement plan or bankruptcy filing. The important thing is that you get a clear picture of where you are and where you’re going by using your budget/spending plan as an effective tool, not a cage that keeps you from enjoying your money.

Creating Budget Goals

The first thing you should do when creating a budget is to write down your financial goals. Financial goals might include:

• Pay off credit card debt.

• Purchase home.

• Go on vacation.

• Invest in your child’s college fund.

• Save for retirement.

When you create these goals, you should be as specific as possible when it comes to costs. For example, maybe your credit card debt is $10,000, write that down and figure out how much interest you’re paying each month. Also, figure out a deadline for reaching your goal. Do you want to pay off that debt in 2 years? How much money would you need to pay per month on average to reach that goal? As a rule, if it will take you more than 5 years to pay off your debts (excluding a mortgage), you probably are technically bankrupt. Putting together a personal budget will help you determine if your financial goals can be met with your current income. And that knowledge puts you in the position of making the right decision for your personal finances.

Income and Expenses

Almost everyone knows that the base of any budget is calculating the difference between your income and expenses. But what many people overlook is including variable and periodic expenses. It’s easy to think about your monthly expenses such as your mortgage/rent, utilities, healthcare or car insurance but forget about expenses that are annual, periodic, or that fluctuate from month-to-month. Let’s take a look at some variable and periodic expenses:

• Clothing costs

• Food costs

• Estimated income taxes (self-employed)

• Home/renters insurance.

• Entertainment

• Household supplies

Be sure to estimate the monthly costs of these variable or periodic expenses so that you can put aside enough money each month to pay them. Now, this is where things can get tricky—many people really do not have control over how much they spend on variable expenses. They convince themselves that they’re paying only $100 on restaurants a month and $200 on clothing when they are really spending $300 on restaurants and $400 on clothing each month. This can easily happen when you don’t have a spending plan or budget. One way to fix this issue is to track your spending habits for three months.

Track Spending

If you really want to maximize the usefulness and accuracy of your budget, you should first track your spending habits for three months. How you track it doesn’t matter. You can track using pen and paper or a smartphone app, as long as you track it. What will happen are two things 1) you will realize that you spend more than you thought and 2) you will begin to spend less since you need to record every expenditure. And this is where some that fear of embarrassment becomes handy—you may begin to feel so embarrassed that you spent $200 at some cheap restaurant in one week that you stop doing it. Once you’ve tracked your spending for three months, you will have a good estimate of how much you really spend on certain expenses. Add that amount to your budget and you will have a more accurate picture of your expenditures.

Tips and Tricks

Sticking to your spending plan or budget may seem tedious or restrictive at first but there are a few tricks you can use to make it easier.

Pay all expenses at the same time. 
Once you’ve listed out your fixed monthly expenses, consider paying them once a month at the same time. This will reduce your stress level and help you not constantly think about your budget. You might also consider paying some periodic expenses once a year such as your insurance so that you don’t have to “budget” for it every month.

Allocate all money including savings. 
Sometimes it can be difficult to save money because you perceive savings as money that’s just sitting around. Shift your perspective a little, and make a plan for your savings. For example, you might plan to use the savings for paying bills when you’re retired or paying for your rent/mortgage if you’re laid off from your job. Having some kind of plan will reduce the chances of you dipping into that pile of savings.

Allocate discretionary income. 
You should always have some money allocated for discretionary spending. By having some cash available for spending on entertainment and nights out with friends, you reduce the chances of breaking your budget by spending money that’s been set aside for other important expenses such as your taxes and debt payments.

Used the right way, your personal budget can be a powerful guide to financial prosperity and security.