There are many elaborate systems for personal budgeting, among them mint.com and Quicken (both Intuit products). I’ve been pushing the open-source GnuCash. These programs are great for keeping track of your transactions, but less helpful for actually controlling your expenses. Key to controlling your expenses is the idea of discretionary versus nondiscretionary. Discretionary items (like movie tickets and vacations) can be changed. Nondiscretionary items (like rent, basic food, etc.) cannot be changed.
For the time being, let’s forget about nondiscretionary items, because we can’t do anything about them. Therefore, budgeting can be as simple as cutting down on the discretionary items. Don’t eat out in restaurants. Don’t buy designer clothes. Cut the discretionary expenses down until your income exceeds your outflows.
But what if you can’t do that? What if your income doesn’t even cover your nondiscretionary items?
First cut discretionary expenses
|Davey helps mow the “lawn”; by jessicafm, on Flickr|
That’s when you must reconsider what you mean by “iscretionary.” First make some “easy” cuts – stop wasting money. For example, reset your thermostat to reduce the heat or air conditioning when you are out of the house. Switch to cheaper brands. Do you really need the super deluxe 10,000-minute/month cell-phone plan? Buy generic brands.
Then cut nondiscretionary expenses
If the easy cuts don’t bring your budget into balance, try more challenging cuts. Mow your own lawn. Sell your car and buy something more efficient (or use mass transit).
If that doesn’t work, then it’s time for more radical surgery. Look for ways to earn more money or seriously reduce the supposedly-nondiscretionary items. Get a second job or start a business. Find a smaller apartment. Move to a city or state where it costs less money to live.
Ultimately, your personal budget should reflect your personal values. Do you spend money on the things that are truly important to you?