Budgeting is a lot like working out at the gym. It's good for you, you know it's good for you, but if you've never done it, it's really hard to get in the habit. Much like going to the gym, or making any change in your life, the key to getting yourself on the budgeting bandwagon is to make small incremental changes and step it up once those changes stick.
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Start with Envelope Budgeting
Envelope budgeting is where you set your budget at the beginning of the month and put cash into labeled envelopes. The labels are your budget categories. So if you budget $500 for groceries, label an envelope "groceries" and put $500 in it. This is the most passive way you can budget and probably the easiest way to get on the wagon.
It's a little bit of hassle managing the various envelopes but you force yourself to stick to a budget if you don't spend more than what's alloted. As you spend money from the envelope, you get feedback on your progress because you can see the supply dwindling. At the end of the month, take the excess and put it in your savings. This method is so effective, and so easy, that many people rely on this method for budgeting.
Track Your Spending
If you don't want to deal with envelopes (or you want to use your best cash back credit card), then you will need to track your spending. The easiest way to start is by signing up for a service that does it for you. Services like Mint.com will pull your credit card transactions and categorize them on your behalf, so you don't need to keep track with pen and paper (or by processing your receipts). If you don't want to go online with it, you can use a desktop package like Quicken to achieve the same goals.
If you want to get down and dirty with your numbers, you can always track it manually and enter it into Excel. If you like playing with numbers, this will give you the most flexibility because you can basically everything with Excel. This also has the added benefit of security. While services like Mint and Quicken are fairly secure, your encrypted information is still flying around the air and is slightly less secure than if it weren't.
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Adjust Your Monthly Budget
Once you've started tracking your spending, it's time to try to improve it and spend less. With spending data, you can begin to analyze the areas in which you may be wasting money on things that aren't important to you. Are you buying lunch every day without thinking about it? Or do you like going out to eat? If the answer is the former, perhaps you should brown bag your lunch to save a few dollars.
The key to starting a budgeting, and sticking with it, has to do with incremental changes that stick. If you try to track your spending down to the penny from the start, you'll probably grow weary of it and give up before it has a chance to help you. The key in budgeting isn't to restrict your enjoyment of life, it's to make sure you are spending your money in the right places. If you don't know where your money goes each month, you can't possibly be sure you're getting the most out of your hard earned dollars.