This is the next installment in a series at Consumerism Commentary about taking control of your finances. Please consider subscribing to the Consumerism Commentary RSS feed for updates.

It’s no secret that budgeting is a chore. Although this piece of personal finance carries an ugly reputation, even a simple form of budgeting will help you achieve more towards your goal of taking control of your finances. Despite the negativity surrounding budgets in the news—the economic slide is affecting corporate and government budgets and people are depressed everywhere—personal budgeting doesn’t have to be an ugly process.

Why develop a budget? The purpose of budgeting is not to force someone into spending less than a certain amount of money towards a particular category. A budget should be more like a guide. Yes, you can set aside money for a certain type of expense, but if you find you need more, you can “borrow” from another category or future time in which you expect to spend less. This borrowing, like debt, can get out of hand, so it should be limited as much as possible. Keep in mind that budgeting is flexible.

The best way to visualize a budget, particularly if you pay all your expenses with cash, is to use a system of envelopes. To simplify the visualization even further, let’s assume you receive your income on Day 1 of each month, and you must use that income throughout the month until your next paycheck on Day 1 of the following month. When you receive your income, you take the cash left after paying income taxes and place it into envelopes. On the outside of each envelope, write the name of a spending category.

You should have envelopes for rent or mortgage, insurance, food, and utilities. Also consider budgeting for transportation, household, debt repayments, entertainment, and charity. To get a good idea of where you spend your money, take a look at your expenses, which you track every month. Your most frequent spending categories should determine the labels for the envelopes. Use the data to determine the amount of income you require in each category each month. This is the amount of cash you should place in the envelope.

Do not neglect infrequent expenses. You may have certain obligations that are not paid monthly, like property taxes. If you pay $1,200 every six months for property taxes, consider your monthly budget to be one-sixth, or $200. Then left that money accumulate in the envelope for half a year until it is time to pay the bill.

Do you have an envelope for savings? You should. Consider setting this envelope apart from the others, perhaps in front so you will be reminded that it is one of the most important destinations for your cash. Everything not distributed to an expense envelope can be placed into the savings envelope. From here you can take as much as possible to the bank for deposit, invest some of it, and spend a small portion.

Now that you’ve set a budget based on your past or current spending, see if you can find a few places to cut back. Can you reduce your budget by 10%? You may find that this is not as hard as it seems, particularly if you have excess cash to spend on wants rather than needs. Start cutting back with your wants, but also look at your needs to see if they can be reduced. Once you’re familiar with using your budget, you can focus on the future rather than your past spending habits.

When you pay expenses by check, credit card, or debit card, you may find that it’s difficult to effectively use physical envelopes to manage your budget. Although placing cash into envelopes won’t work for everyone, the metaphor can be extended to software. Here are some of the popular choices:

• Mvelopes is a website that lets you manage your personal finances online. The site focuses on your budget using a virtual envelope system similar to what I’ve described. Fee: $7.90 or more per month.
• You Need a Budget is a tool you can download to help you organize your budget. Fee: $12 to $50 to download.
• Intuit Quicken has a budgeting system included but many people find the feature difficult to use. Fee: $45 or more to download with this link (regularly $60 or more).
• PearBudget is another web-based option that follows the envelope system. Fee: $3 per month.

If nothing else, use the $0.10 option: a pencil and paper. Writing down your budget will help you stick to it, whether you use paper or computer software. I started my first budget with a pencil and paper even though I was inclined towards computers. I was in a transition phase in my life, trying to get myself into financial shape for the first time. After working for a few years out of college, I left my low-paying, high-expense non-profit job and moved back in with family for about four months. I worked out a plan and a budget, found a new job, and by the time I moved out I was in control. Money was still tight, so I stuck close to my budget for a while.

As you see more financial success as a result of spending less and earning more, you may be tempted to move away from your budget. Despite other advice suggesting to always stick to a budget, it’s a good idea to focus less on the categorization and limitation of your expenses as the need decreases By the time you are sufficiently saving and investing money every month, the energy you spend working with a budget could probably be better spent on other activities. But it doesn’t hurt to check in with a budget once in a while. It has been suggested that more confident personal money managers will succeed better with an annual budget. Always keep tabs on your spending, and evaluate the trends, but don’t tie yourself down.

Budgeting, even in the early stages, should not be seen as a burden. Here are some tips to make budgeting easier.

Consider the 60% rule. I’m not a fan of rules, but sometimes a guideline can help get you started on the right path. As an individual, you can decide what’s right for you, but sometimes an example helps. The 60% rule suggests that the first 60% of your gross income (before income taxes are taken out) should be designated for your non-discretionary, essential expenses, like housing, food, clothing, and taxes. The rest of the income should be split with 10% going towards savings, 10% towards retirement, and the rest for “fun,” or your discretionary expenses.

Reward yourself for staying under budget. If your budget is realistic—not too difficult nor too easy to achieve—then you should reward yourself when you spend less than you plan. With your “fun” expenses, your spending may be variable month to month and difficult to predict. If you make a conscientious effort to spend less than you expected, perhaps by seeing fewer movies in the theater or cutting back on vacation plans, you have extra money left in your envelope (virtual or otherwise). First, move that excess money to savings. If you don’t perceive savings to be an intrinsic reward, treat yourself to something you’d like.

Use ING Direct’s subaccount feature. Since you can split money in ING Direct’s high-yield savings account into separate buckets, you can label these subaccounts to match your budgeting categories. this lets you earn a decent interest rate while keeping your money organized.

Pay yourself first. No matter what, make sure some of your excess income is diverted to your savings. If you set up direct deposit into your checking or savings account, this will require less work. Your savings envelope contains 100% of your income (minus income taxes) after you are paid, and from there you can distribute funds to your remaining envelopes.

Please share any budgeting advice or suggestions!

Photo credits: Bill in Ash Vegas, Jeff Keen

I may have fallen back into old habits. Several years ago, when I was refreshing my life and beginning to control my finances, I made deep cuts into my expenses. I took on three roommates, paying only $325 a month for my portion of rent. I didn’t own a car and relied on mass transit for most of my transportation. When I did move out on my own, finding one of the least expensive apartments in town, I eliminated all but the most basic cable television.

There was more I could have done had I wanted to reduce my expenses, but I reached the point at which I was consistently investing and saving money every month.

As my income has grown over the past few years, I’ve allowed my expenses to follow. I moved into an apartment I actually like and feel comfortable spending some cash on unnecessary things I like, such as amateur coin collecting, amateur photography, and amateur high-definition entertainment enjoyment.

I’ve already thought of some ways to reduce my expenses by $10,000 a year. Consumer Reports has some suggestions for finding another $6,000 a year, but only a few apply to me. How about you?

Find cheaper auto insurance. I mentioned that several years ago I didn’t have a car. That wasn’t quite by choice; my license was suspended when I was younger for failure to pay speeding tickets. It would be easy to say that I received those tickets thanks to a stressful job working 100 hours a week and my failure to pay was because I had no money, but I should have been more responsible. Until I got rid of the car, my insurance was about $4,000 a year if I remember correctly. Now my insurance is about $1,500 a year, and I could only find that rate by shopping around for a while. It’s been several years since I’ve shopped around, so that’s something I will consider. I need to add renter’s insurance as well—something I’m sad to admit I’ve never had despite its reportedly low price.

Optimize your life insurance. Right now, my cat Rupert is the only living being that relies on my income to survive. I have not opted for life insurance yet as it will be generally unnecessary until I have a (human) family. According to Consumer Reports, insurance premiums have decreased on average, so it may be a good time to replace your policy with a new one. You may be able to get the same coverage for less.

Shop smart for food. Buying food for a single guy is not simple. Food is usually packaged for families. This means I usually end up spending more per meal and eating larger portions that I should be. I don’t enjoy spending time preparing and cooking dinner. I have accepted my failure at brown-bagging my lunch and moved on. Consumer Reports’ advice is tailored to a family, indicating on average an household could save $190 a month by shifting to less expensive food. My entire monthly grocery bill is about $190, though eating out (and ordering in) matches that.

Plan menus around sales on fresh poultry, fish, meat, dairy, and produce, and make use of leftovers. Avoid costly prepared meals. Eat more low-priced, high-nutrition foods such as beans and potatoes… Shop in lower-cost stores such as Aldi Foods, PriceRite, Costco, Trader Joe’s, Wal-Mart, and Sam’s Club, but be sure to compare prices. Try less-expensive store brands. Sign up for store discount cards. Stock up on sale-priced staples.

Stop paying bank fees. This is one of the most unnecessary expenses for just about everyone in the United States of America. There is rarely a reason that you should have to pay incidental or monthly fees for any basic banking service if you manage your money. Avoid overdraft fees or over-the-limit fees by being aware of your account balances. Avoid monthly or yearly maintenance fees by taking advantage of only free accounts—there are many to choose from if your bank insists on charging you a fee for your banking. Avoid cash withdrawal fees by using the right ATMs.

According to Consumer Reports, 52% of consumers don’t pay any bank fees, but the rest pay lots.

Optimize your telephone service. I don’t spend that much time on the phone. I could probably save a lot of money if I were to choose a prepaid cell phone plan. However, I chose a Blackberry plan with Verizon Wireless, which I use more for business, and I don’t intend on changing the plan.

I’ve helped other people look at their telephone usage habits and choosing a plan that better fits the amount of time they spend on the phone. On many plans, going over the allotted number of minutes can be very expensive. If you’re consistently exceeding your limit, you can save tons of money by switching plans.

Pay off your credit card. According to Consumerism Commentary, “On average, consumers who carry a balance owe $2,200, on which they pay 15.2 percent in annual interest charges.” Paying that much interest negates any progress you may be achieving with your savings or investments. To get rid of credit card debt, stop using the cards and then apply the Debt Avalanche.

It’s been several years since I’ve paid interest on a credit card, but I still pay about $30 a month on my student loan interest. I still have a student loan because several years ago, I applied some tuition reimbursement towards expenses rather than my loan. I probably should have done whatever possible to avoid that, but for whatever reason, it was the choice I made. At the time, the interest on the student loan was about 2% and I was earning more in my savings accounts, but that’s no longer the case. Therefore, I have been increasing my debt repayments every month this year, with the goal of vanquishing the remaining balance by the end of the year. If I decide that goal still makes sense, I’ll have to accelerate in order to achieve it.

According to Consumer Reports, the average family can save $500 by making the changes listed above. I have a feeling that many Consumerism Commentary readers are already optimized.

Cut your spending by $500 per month, Consumer Reports, August 2008 (subscription required)

In about 6.5 months, I will be free of credit card debt for the first time since 1998. Much like Inigo Montoya and the “Revenge Business”, now that it’s over, I don’a know what to do with the rest of my life.

Readers of Consumerism Commentary have proven their wisdom many times over, so I’d like to take that into consideration. Please visit my YayBoo page on the subject and help me prioritize my next steps.

Or, you should be able to use the widget below:

(If you follow Consumerism Commentary through an RSS reader, you may have to visit this page directly to see the widget.)

I have never been a fan of a monthly budget. In early 2002, when I admitted I was spending more than I was earning, I forced myself to enact categorical limits for my expenses. It helped for a short time, but it wasn’t long before I found myself with a new spending philosophy and more income. The system of budgeting eventually became less imperative. I was in the habit of controlling my spending, and the shackles of a budget were not for me.

Also, my budget was frequently off. In a category like clothing, for which I may have budgeted $25 a month for new clothes, I may be significantly over the limit one month while under the limit for several following months.

The “envelope” budgeting system lets you carry over the unused surplus in one category to be used later. If I spend only $10 in clothing in April, the remaining $15 can be added to my available funds in May. For me, if I were to budget, this flexibility would be one of the most important aspects. Also, I would require the flexibility to adjust my budget whether life changes require an increase in spending or if my observed patterns are different than I expected.

But what good is a budget in terms of motivation for real change if you know you can adjust it to fit your desires as you progress?

People generally don’t budget well when projecting monthly expenses. There is a tendency to underestimate true expenses, particularly when actual historical data aren’t used as the basis. A budget in this form creates expectations which, if not met, could lead to lowered motivation. A budget abandoned after the first few months is a wasted exercise.

A recent study concluded that a budget based on yearly expenses will be a better spending plan. People tend to overestimate their expenses when they consider the entire year ahead. Actual spending will have a better chance of falling within the budget, and this success could motivate further budgeting.

By looking at your expenses over an entire year, you give the bumps a chance to smooth.

If you are bored or frustrated by typical budgeting, particularly the way budgeting is designed in software like Quicken and Money, try looking at the larger picture rather than focusing on fluctuating monthly expenses.

The Year of Magical Budgeting [New York Times]

About the author: This is a guest post by the anonymous author of the blog Father Sez, a father of four children who wishes to share with and learn from other parents with the goal of preparing children for facing the world independently.

You know your financial life is in a mess. You know the steps you should take in order to straighten your financial life out. You set SMART financial goals and developed plans to achieve these goals. You figure that if you keep plodding at your plans you’ll eventually reach your goals.

Life is not often this simple. There will be obstacles. Old habits may be a little hard to break.

Having a turbo charger will help.

And what would that be? Simple, start your own personal finance blog! A blog that would chronicle your past, your present goals to transform yourself, and your journey to achieve these goals.

a) The Dumb Little Man wrote a great article on the 7 common reasons why people fail to achieve their goals. Prominent amongst them was failure to write down the goals, failing to review them periodically and not having a support group.

Your blog by its very nature will overcome these. This happens by the very process of you writing up your posts, doing the research that may be needed for the post and the comments that your readers would be making. And very importantly on a regular basis.

b) Having a goal buddy is accepted as a powerful aid to achieving goals. They provide motivation, accountability and preserve our determination. I am sure you’ll agree that it’s not easy to find a goal buddy. With your blog, the readers in the community you build will be your buddies. They’ll give you continuous motivation, accountability and determination.

c) Once you have started your blog and announced its supporting mission statement, you’ll start feeling that you have a duty to perform—a duty to studiously and strenuously work to achieve your goals. You’ll feel that you are a role model to your readers.

Read how the act of not following his own suggestions for a mere two months affects Glbl Guy. He confesses this slip up to his readers, whom he calls his accountability partners.

Incidentally, he received a whopping number of comments, every one of them supporting and encouraging him and to overlook the lapses as just being human. You cannot get a better community of goal buddies than this!

d) Receive continuous guidance, tips and resources on improvements that can be made in your plans. The blogosphere is incredibly generous when it comes to sharing information and tips. As you proceed on your blogging journey, you’ll find yourself reading a lot of other blogs. And you’ll find tons and tons of advice and help.

You can get solutions to almost every obstacle that you may meet in your own journey of financial transformation. Tips on frugality, 100 ways to reduce your energy bills, how to prepare your budget, financial calculators, or understanding risk, all are answered in other blogs.

Many of the blogs I read and respect were set up for this very reason.

For example, Flexo created Consumerism Commentary to “hold himself accountable for his finances.” Ana of Debt Free Revolution wants to detail her debt reduction efforts and strategies.

Present day technology has made it easy to create and maintain a blog. While some people may swear by online tools that help in our goal setting and achieving process, I suggest that starting a personal finance blog (or a fitness/health blog, if getting rid of excess weight is your goal) is a far better option.

Just starting a blog for the sake of starting a blog will not be of much use. You must first have a will, a will to transform your life. When you have this will, the blog will turbo charge your journey to transformation.

To start your blog, visit WordPress.com. If you are joining the personal finance blogosphere, add your blog to the index at pfblogs.org and get insight about running your blog at the MoneyBlogNetwork Forums.

To read more about finance and family from this author, visit Father Sez and subscribe to the blog’s RSS feed.