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One of the biggest tools of success when it comes to money management involves knowing where your money goes each month. Many individuals, couples and families fall into financial trouble but don’t understand why because they miss this financial management basic.

Making a budget and a spend-tracking sheet can feel a bit like having overly strict parents: your budget tells you what to do, and your spend-tracking sheet is there to shame you or punish you when you don’t follow your budget. This perception of budgeting and spend tracking, however, is misguided. What a budget and a spend-tracking sheet truly do is give you freedom: the freedom to tailor your current spending practices in a way that helps ensure you are managing your money in line with your monetary and life goals and dreams.

In our particular case, it was a simple lack of creating budgeting percentages and tracking our spending that got us into tens of thousands of dollars in credit card debt. We couldn’t figure out why we were in the hole each month, and only tracked our spending based on assumptions that we made about them. When we decided to go back and add up our 2012 spending in December of 2012, we were floored at what we found.

We assumed we were spending $600 a month or so on groceries; in reality we were spending about $900 a month. We assumed we were spending about $100 a month on eating out; in reality were spending $275 a month. A lack of budgeting and tracking our spending had a huge impact on our financial situation, and it wasn’t a good one. The reality of the impact of a lack of budgeting and spend tracking on our money hit us hard, and we’re still working to pay off the debt we accumulated from that mistake.

It’s important to work budgeting and spend tracking together as a team instead of using just one or the other as you plan your monthly spending. If you budget without tracking spending, you have no idea if you’re staying within the spending guidelines you’ve allotted for each category. This can be especially challenging in spending areas such as groceries, entertainment and restaurant expenses.

If you track your spending without first setting a goal dollar amount for each category, you can easily spend more than you would like to in one or several categories. With a pre-set budget, you have a number to aim for that will help ensure you making efforts to control spending so that you have more money to put toward your financial goals, whether those goals be saving money for a house, paying off debt or working toward financial freedom.

Although working on and living within a budget and tracking your spending may seem restrictive at first, I’d be willing to bet that the excitement over the monetary savings you experience by having a plan for your money will far outweigh any pre-budget sense of restriction you might feel before you start utilizing these powerful financial tools. So, are you ready to give it a try?

Here are some guidelines that you can use as you prepare your monthly budget. Feel free to tweak these percentages to fit your particular spending goals; just make sure that your percentages add up to 100% each month. A “zero-based” budget“, as it’s called, ensures that every dollar has a “job” and that no money is left unaccounted for. Unaccounted money often means wasted money.

Monthly Budget Percentages by Category

Here are some guidelines that will help you to make your own budget. Your percentages may vary from these suggestions due to the size of your family, the area you live in (cost of living varies from city to city), and what your financial goals are. Remember that it’s important to tailor your budget to fit you and/or your family’s own personal needs and lifestyle.

Category % of Take Home Pay
Giving 10 – 15%
Medical 5 – 10%
Housing 25 – 35%
Transportation 10 – 15%
Savings 10 – 15%
Food 10 – 15%
Utilities 5 – 10%
Insurance 10 – 20%
Recreation 5 – 10%
Clothing 2 – 5%
Personal 5 – 10%

Spend Tracking is Vital, but Consider Using Cash too

Another personal finance tool that may help you stick to your budgeted percentages is the cash envelope system. Money is easy to waste, especially in today’s plastic driven, app driven virtual banking society. When you don’t actually see the money leave your hand as you make your purchase, it’s very easy to forget that it’s the same money that you work so hard for each week. Instead, it’s just a line on your digital bank statement.

The reality of today’s banking technology means that it’s a whole lot easier to spend a little bit of money each day that, at the end of the month, adds up to a whole lot of your paycheck. This reality leaves a large percentage of people wondering where their money disappears to each month and incorrectly assuming that they simply don’t earn enough to “make it”.

By using a cash envelope system for expenses such as groceries, entertainment, meals out and other flexible spending categories, you can be sure you’re not spending over the allotted amount in your budget because you simply commit to using only the money in the envelope for those expenses. Once the money is gone, you’re finished spending in that category for the month.

Avoid “Disappearing” Money

One way to avoid the pitfalls of “disappearing” money is to set new monthly budget percentages each month for each category of your spending. By determining beforehand how much money you’ll spend in each spending category, and then tracking your spending to be sure you stick to your budget, you stand a much better chance of ensuring that your earnings go where you truly want them to go each month.

You also help eliminate the amount of money that “disappears” into the black hole of spending.As you get accustomed to using  percentages to plan your budget, you’ll likely find yourself tweaking your percentage amounts to fit within your particular monetary needs and goals.

Tweak Your Budget Regularly

Tweaking your budget each month until you find a system that works well for you and/or your family is a vital part of a successful financial plan. Because no person/family is the same as another, no budget will work well if it is based off of someone’s budgeting plan. Also, it’s probable that your spending in each category may change from month to month depending on what bills are due when.

For example, since car tabs are only due one time during the year, you’ll likely have a month when you spend more on auto maintenance to cover auto tab costs. Dave Ramsey recommends calculating your annual costs in categories such as auto maintenance and dividing that number by twelve. You then save the necessary amount of cash each month (either in your cash envelope for that category or in a separate bank savings account) so that when the bigger expense months arrive, you’ve already got the cash set aside.

No matter which method you choose, it’s vital to budgeting success to analyze your spending and budgeting categories each month to see if changes need to be made that will better suit your individual financial situation.Learning to use budget percentages to maximize the success of your financial budget is an important part of successful money management and wealth-building. Use this powerful tool to help ensure that you do indeed reach your financial dreams and goals.

Do you budget using percentage guidelines?  What’s your favorite budgeting tip?