Released: October 01, 2007

Don’t leave reality out of budget

Source: Humberto Cruz [Baltimore Sun]

If we spend $500 for groceries each month and can’t possibly lower the total, then it’s foolish to budget $450. Budgets must be based on reality, which is why I recommend keeping track of all expenses for at least three months before drawing up a budget.

With more discretionary expenses, flexibility is possible and essential. Say we allow $100 a month for eating out, and one month we spend $50. Like rollover minutes in a cell phone plan, we now have a reserve we can spend the next month.

But if we also budgeted $100 for going to the movies and spent $150, we’d be wise to count the $50 reserve for eating out and come out even.

Also, if we have a $300 car insurance premium due in six months, it’s smart to set aside $50 every month for it. It’s also smart to budget monthly savings toward long-term goals, including retirement.

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