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How Personal Budgets Work


Testing Your Budget

T­esting your budget requires diligence. You need to keep detailed records of your earnings and expenses to see if the budget is working.

Once again, finance software can make this a lot easier. As you spend money throughout the day, make sure to keep your receipts. At the end of the day, sit down at the computer and enter all of your expenses into the appropriate categories. The finance software will automatically gauge whether or not you're on track for meeting your monthly spending goals.

The most important thing to know about personal budgets is that they're not written in stone. Budgets are designed to be flexible, especially during those first two or three months. Perhaps there are expenses or earnings that you forgot to include in your original assessment. You might not have accounted for seasonal or annual expenses like property taxes, car registration or tax preparation fees [source: Nolo.com].

Make adjustments as needed until you find a budget recipe that allows you put away a reasonable amount of money each month. The goal is at least 10 percent, but that doesn't have to happen immediately.

It's also important to recognize that budget priorities shift as you get older. Experts recommend that you review your budget every few months to make sure that spending goals still make sense [source: Yahoo! Finance].

Remember to consider inflation when you review your budget. Inflation grows at an average rate of 3 percent a year [source: CNN Money]. To stay ahead of inflation, you need to make sure that your income grows at a faster rate. Even if you get a 5 percent raise, don't think of it as an excuse to spend 5 percent more this year. At best, you can spend 2 percent more, but the truly smart thing to do would be to use that extra 2 percent to pay off debt and increase your savings.

Another tip: If you carry credit card debt or other high interest debts, pay off those debts first before increasing your savings. It doesn't make sense to invest in a low-interest savings account if your debt is growing exponentially.

If you want help with your personal budget, there are many non-profit and government budget counseling services and financial education centers. Beware of debt-consolidation or debt-reduction services that charge a fee.

For lots more helpful information on creating a successful personal budget, follow the links on the next page.


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