"Don't spend more than you earn" is an insight from the ages.
The 13th-century architect, mathematician, artist and Renaissance intellectual Leon Battista Alberti cautioned "that your expenditure should never exceed your income." The 19th-century novelist Charles Dickens memorably captured the same sentiment in David Copperfield. The kindly but debt-ridden Mr. Wilkins Micawber advised a young David Copperfield, "Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."
It may reflect an improving economy or the arrival of spring, but I have been getting more questions about establishing a budget to embrace happiness and not misery. A budget is simply a way to seize control over financial chaos. The payoff is that you end up spending your money where you want and save for what you would like to do. For a relatively small investment in time and effort, a budget has the potential to generate a lifetime of good financial habits.
What goes into a budget? Everything related to money. It includes your essential expenditures, such as housing and food, to your discretionary expenses like beauty salon and cable TV, to debts such as car loan and credit card balances and, of course, your income. When you've gathered all the numbers and converted them into monthly figures, you can calculate the bottom line: Your monthly net income minus your total monthly expenses.
There are plenty of tools available to help you construct a budget. Quicken is among several excellent computer programs for data management. Better yet, the new generation of online services for budgeting is terrific. For example, Mint.com is remarkably easy to use. (It has been bought by Quicken.) Mint will aggregate all your credit card, savings, investment, mortgage, auto loan and other financial data. You mine the information to see where your money is going. Mint is a monitoring tool that facilitates budgeting. The web-based budgeting tool sites keep getting better, too. Many banks, credit unions and other financial institutions are improving their online budgeting programs for customers, too.
But tracking expenditures with a calculator, notebook and pencil works well, too, in most circumstances.
Budgeting is a tool, not a goal. In an interview I did several years ago with Eric Tyson, author of "Personal Finance for Dummies'' (and a number of other terrific finance books) we talked about a couple that was making a budget. They were eager to do all kinds of data entry on the computer. Tyson's response was "do they really need to be tracking all of their spending on a monthly basis? Because if they set a specific savings goal like, 'we are going to save 10 percent of our income ... each month,' and they are able to do that, then my feeling is who cares where it goes after you have accomplished that savings."
I vote for keeping a record of your spending for several months to find out where your money is going, and use that for creating a working budget. But once you have one, it's no longer necessary to minutely follow your expenses -- unless there's a good reason to do it.
Chris Farrell is economics editor for American Public Media's "Marketplace Money." Send questions to firstname.lastname@example.org.