MP Dunleavey

The Basics

5 steps to fix a broken budget

It's hard enough to devise a spending plan -- but what if, after all that effort, something's still not right? Here's how to make it all add up.

By MP Dunleavey

Editor's note: Join columnist MP Dunleavey and a group of women as they seek to strip away the myths around money, liberate themselves from debt and find financial sanity. Follow the ongoing quest of the Women in Red every other Wednesday in Dunleavey's column on MSN Money.

"I have failed at budgets for 20 years," says Tara McNaughton, a consultant who lives in Chicago.

She has written down countless spending plans on paper.

She has tracked her expenses rigorously using Excel and Microsoft Money.

McNaughton even had a financial epiphany after watching a Suze Orman special on PBS. "I never realized that you could make money an area of strategic focus," she says.

"But that was 10 years ago -- and I still don't have a working budget!"

What's going wrong?

The reason budgets fail

Like many people who have struggled to create, never mind stick to, a budget, McNaughton blames herself.

But as a hardworking single mom with a master's degree under her belt -- and a career that involves complex statistical analyses of medical and dental data -- McNaughton is no slouch when it comes to handling numbers.

The problem is that she's making a few basic miscalculations that repeatedly throw her budget off track. Here's how to get back on the road to financial progress:

5 steps to fix your budget

Understand your motivation. Budgets often fail because they lack a sense of purpose, says Tricia, a founding member of the Women in Red and our resident budget czar. "You have to define the reason why you're doing it. Saying 'I'm budgeting because someone told me to' won't work."

McNaughton's budget has a purpose: She wants to enjoy a better, happier way of life in retirement. "Every dollar I save is like investing in my freedom."

But she readily admits that when life happens, "I tend to drift."

The trick, says Amanda Bellamy, a Woman in Red who works for the city of Mission Viejo, Calif., is to rely on that goal as an anchor for all your spending decisions, day in and day out.

"It keeps you going in those weak moments when you don't want to limit yourself. 'But I want to see this movie or go have dinner with my friends.'"

Know your numbers. The biggest budget buster for most people comes long before they overspend, says Tricia: "You have to track all your expenses, and that's where most people drop off."

A couple of years ago, McNaughton spent six months tracking her spending -- religiously using software. So why didn't it take?

Thanks to a series of overwhelming life changes -- a major illness, a new home, a new job -- she quit monitoring her cash flow.

What McNaughton needs now is a method -- paper, digital, abacus -- that will keep her expenses front and center, says Tricia. "Record keeping is really important, especially in the beginning, when there's a tendency to say, 'Oh, spending $5 here or there doesn't matter.'"

Get real. Your budget is more likely to implode if you tighten your belt too quickly. "If you want to save $200 a month, see if you can save $50 in a week first," Tricia recommends. "Baby steps are best."

That's what my husband and I discovered when we began the Grocery Challenge with a daredevil vow to cut our $400 monthly grocery bill in half.

Ha!

After a month of missteps, we did manage to cut it by 25%. Lesson learned.

Video on MSN Money

Fun budget © Don Mason / Blend Images / Getty Images
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Bellamy recommends revamping your spending a couple of categories at a time. Track your groceries and utilities for a month, analyze those expenses, then move on to your personal care and entertainment spending, and so forth.

Decide on a target amount to maintain or to trim in each category, depending upon your goals.

Without regular expense tracking in Step 2, of course, you'll quickly lose control of your spending in all categories, which is what McNaughton has found. "Because I don't have a good idea of what I'm spending each month, I want to cut it down, but I don't know what I'm cutting."

Continued: Make it work for you

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