Financial Foundation Key #2: Use a Budget

A budget is sometimes considered the most despised tool for tracking your finances. No one really wants to lock themselves down to a budget that keeps them from spending what they want. But that is just it, some people may need something to keep them from spending more than they make. A budget is the only way to track your spending against an expectation or plan. Whether you follow a budget strictly or simply use it at the end of the month to see where your money went, it can be the most useful tool in your finance shed.

The usefulness of a budget lies in the accuracy of actual expenditures. If actual expenses are not tracked at the same level of detail as your budget, your budget is not able to report meaningful information at the end of a period. I've created my own Excel spreadsheet (available for download) of a simple monthly budget that can easily be customized to fit the categories that apply to your family. Also keep in mind that you will need to track your actual expenses at the same level of detail for the budget to be truly useful. In the end, you simply need to know whether you are spending more than you make.

You may notice that I've included lines in the budget sheet for investments. Budgeting monthly contributions to retirement accounts, education accounts for kids, and other savings for a rainy day is important to remember. Otherwise you may feel that you are living within your means, but in actuality you have nothing set aside for unexpected events or even expected events such as retirement someday.

I'll also note that there are several applications that can assist in budgeting, tracking actual expenses, planning, and reporting such as Quicken. These tools are obviously full of more tools than a simple spreadsheet, but they usually require additional time commitments to make them useful. One online tool is Mint.com, which is a free site to help you classify your income and expenses automatically by syncing up with your banks and other financial institutions. I've recently opened an account to test it out, but need to play around a little more to see how useful it can be. At first glance, it will at least consolidate your bank and credit card activity (and any other activity with a financial institution within its database) and show some helpful reports to know your standing. Of course, the reports are only as accurate as the data used to create them so be aware of how certain expenses are automatically being classified. Mint.com is also being acquired by Intuit, the maker of Quicken, so there may be changes ahead for Mint.com users once Intuit decides how it wants to integrate Mint.com into its product offerings.

Hopefully some of these tools help you in managing your finances in a way that works best for your family.