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How To Make A Household Budget That Works

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Drafting a family budget is the easy part because all you've got to overcome is inertia. Sticking to it takes work.

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Many people just spend as needed, or desired, and hope the next paycheck arrives before the money runs out. This is a mistake, but it's easily corrected by drafting a budget – and sticking to it. A spending plan will help you define your expenses and following it will point you in the direction of future savings.

A financial tune-up will help stretch your paycheck to meet basic needs and leave a little at the end of the month for fun.

"Lots of people have big gaps in their spending – they don't know where much of their money goes," says Liz Weston, author of three books on personal finance, including the upcoming Easy Money: How to Simplify Your Finances and Get What You Want Out of Life. "Tracking what you spend can help you spot ways you're wasting money and areas where you can cut back. This isn't about deprivation – it's about making sure your money goes as far as possible and that you're using it for things that matter most to you."

Tracking your spending isn't hard and doesn't have to be fancy. A pencil and notebook will do the job. If you want to include more detail, consider software packages such as Money or Quicken. Community Web sites such as Wesabe or Mint can be helpful.

Start by listing your fixed costs: mortgage payment or rent, utilities, insurance, car payment and operating costs, including gas, oil changes and scheduled maintenance. Then add food, including what you spend to eat out. Don't forget clothes for you and the kids.

The more detailed you make your budget, the more accurate it will be and the better you'll be able to track your expenses and find areas to cut. A major benefit: Keeping a wary eye on expenses is the first step in avoiding identity theft. (See How To Avoid ID Theft for more information.)

Take a little off the top each month for savings – think about setting up an automatic transfer from your paycheck. Don't count on saving whatever's left over at the end of the month because expenses routinely expand to consume available income and your savings account will flatline. (See CDARS: Seeing the Forest for the Trees to learn more.)

If you're over-extended on your credit cards, take immediate steps to get things in line. How To Fix Your Credit, How To Read A Credit Report and What Is A FICO Score And How Does It Affect You? can all help you learn how.

Think of the family budget as your roadmap to financial independence. Along the way, here are some suggested ways to save:

  • Today's study question: Will life as you know it end if your shirts don't have a little alligator or other logo on 'em?

  • Make restaurant trips an occasional treat – not a substitute for preparing a meal at home.

  • Make heating stupid-proof by installing a programmable thermostat that flips the heat on each morning, backs off during the day when you're at work, cranks the temperature up again in the evening and drops it to 55 degrees or so overnight. A good model will allow you to program for extended time away from home, including weekends. Put on a flannel shirt or sweater and you won't notice that you've dialed down the heat.

  • In summer, turn off the air conditioning when you're away. Run fans in conjunction with the AC and you can set the thermostat higher and still be comfortable.

  • Do you need his/hers and kids' cars? Chances are someone could take public transportation – or walk – and live to tell the tale.

  • You probably buy can generic drugs when possible and save a bundle. Extend Brand X purchases to household supplies such as cleanser, soap, paper towels – you name it.

  • Grab store coupons at the mall for mundane things you plan to buy. Many Internet sites offer printable coupons. You can make it a game with the kids. Use the coupons and tell them, "Wow! We saved $17.29 on groceries this week."

  • Renting DVDs is cheaper than trekking to the multiplex and you can make the popcorn in the microwave. It may be possible to buy your favorite movie on DVD for less than the price of two theater tickets.

  • There are clubs for just about every special interest or hobby. Some might save money and may open a new world to your kids. For example, the local history club will teach you about your town and you may pick up handyman skills.

  • Borrow books from the library and you won't have to dust 'em in the bookcase.

  • Search the Internet for books on household tips. Start with a low-flow shower. You can save money by washing with cold water rather than hot and – yes – hanging your clothes outside on a line rather than running the dryer. Many utilities offer home energy audits that point out areas where customers could save energy.

Vitaliy Katsenelson, a Minyanville professor and vice president and portfolio manager at Investment Management Associates, suggests setting aside money throughout the year for anticipated expenses such as vacation, home repair or the deductible on your car insurance.

"I put money each month in my vacation account," Katsenelson says. "This forces discipline because you spend only the money you have. If you don't have money set aside, you don't go on vacation that year."

Drafting a family budget is the easy part because all you've got to overcome is inertia. Sticking to it takes work. But if you track your expenses within the framework of a realistic budget, you'll find that you'll be able to manage your money and won't be living paycheck to paycheck.

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