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To fix budget problems, try the 'divide and conquer' technique

Break down your budget into finer slices to identify overspending

By Gary Foreman

The New Frugal You
New Frugal You columnist Gary Foreman
Gary Foreman is a former financial planner who currently edits The Dollar Stretcher website and newsletters. He writes "New Frugal You," a weekly Q&A column about frugal living, for CreditCards.com

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Question for the CreditCards.com expert

Dear New Frugal You
We're trying to use a budget to control and reduce our spending. But we're having a problem with the food category. I tend to buy toilet paper, paper towels and cleaning supplies at the grocery store. So our "food" budget gets hit with things that aren't really food. How should I deal with this? Would a separate category be helpful? -- New to Budgeting

Answer for the CreditCards.com expert Dear New,
Good for you. Much as we don't like budgets, they are a valuable tool in controlling your finances. Contrary to what most people think, a budget is not a pair of financial handcuffs that you put on. Rather, a budget is a management tool that helps you know when you're doing well. And when you're having problems, it will help you identify where you need to make changes.

As you've mentioned, food is a big expense for most families. And, unlike the other big expenses (housing and transportation), it's easier to make small changes that can add up to big savings over time. So the grocery category is a great place for most families to look for savings.

You've also discovered one of the challenges of keeping a budget. Determining what expenses should be put in what categories. Turns out that flexibility that makes you ask the question is part of what makes a budget so useful to you.

Why? Because you read a budget from the bottom up. You begin with the bottom line and work your way up the report. You don't have to study every line on your monthly performance. You only look at areas that need attention.

For instance, let's suppose that you expected to spend $4,000 in January. If that's what you actually spent, you'll just want to scan the major expense categories (food, housing, transportation, etc.) to see if there are any surprises. Unless you find a surprise, you're through. No need to spend more time analyzing data. Your plan is working.

On the other hand, suppose that you spent $4,500 -- $500 more than you planned. Then you'll want to look at your major categories to see which one(s) didn't go according to your plan. When you find the category, you'll look at the details that make up that total to see what's happening and what you can do to change it.

By starting at the bottom line, you'll be able to gather the maximum amount of useful info with the least amount of effort.

Let's apply that to your situation. You didn't say whether you think you spend too much on groceries, but let's for a moment assume that you do or that you just want to know more about where all the money goes. (It's a question many people are asking when they get home from the grocery store these days.)

Right now, both food and household items are included in the total. If you're typical, food costs take up about 14 percent of your after-tax income and an additional 1 percent goes to household supplies. So you should be spending about $600 of your $4,000 monthly budget on food and household supplies.

Trying to find what happened among dozens of purchases in a $600 category could be hard. The key is to keep looking at smaller and smaller categories until you can figure out what's going on. So, at least for a while, it might be wise to take the time to separate food from household supplies when you get home from the store. You won't need to do it forever -- just long enough to get a feel for what you actually spend in each category.

You may find that the problem isn't in the household supplies, but on the food side. If you have a budget problem, divide and conquer it: Divide the "food" category into smaller units -- meats, dairy, produce and everything else. Remember that you'll only be doing this until you can understand and deal with any problems, either by trimming the fat or adjusting your budget to allow it. (For some reason, I'm suddenly thinking about sirloin steak.) After dealing with the issue, go back to combining the expenses into the bigger category.

You can use your budget and this technique to identify any problem area of spending. Just look for the category that's above your plan and then break it down until you find what's causing the extra expense.

Ultimately, whether you keep the food and household supplies in the same category is up to you. Fewer categories means less time spent tracking. So only have as many categories as you need to control your finances. Temporarily split categories if you're trying to find a problem.

See related: Creating a spending plan, A generic budget: Guidelines for creating spending categories

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Published: March 1, 2012


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