Creating A Realistic Budget
Budgeting -- ooh, what a scary word! If you want to frighten someone whose
finances are out of control, suggest that they tally up their expenses on
a piece of paper. We all understand the value of such an exercise, but
when it comes to the practicality of putting a budget together, we get
cold feet. Budgeting doesn't have to be so painful, when you have a
systematic series of steps to follow.
SET YOUR FINANCIAL GOALS
As with any other area of your life, it's pointless to start down a
financial path if you don't you have some idea of where you want to end
up. What is your REASON for creating a budget? Do you want to pay off your
debts? Save for your kids' college education? Put money away for
retirement? Make a list of your financial goals for the next 6 months,
year, 5 years, 10, 25 -- all the way through to old age. And don't spend a
lot of time worrying about feasibility -- if your goal is to be debt free
in a year, don't think about all of the reasons why you won't be able to
make it by that deadline. Just remember, where there's a will, there's a
way!
CREATE THE SHEET
Start with either a sheet of legal paper -- or a spreadsheet program --
and create 12 columns. Label the top of each column with a month of the
year, from January to December (duh!) Each row on your sheet will
represent a different living expense -- groceries, gasoline, Starbucks
coffee in the morning on the way to work. You'll have better luck
remembering everything that you spend money on if you think according to
categories. "Automobile" would include gas, repairs, insurance, and taxes
-- while "grooming" might be divided into clothes, makeup, haircuts, and
facials.
TRACK YOUR EXPENSES
How can you know what steps you need to take to reach your goal until you
know exactly where you are right now? Most of us don't have a clue where
our money goes -- credit cards and ATM's make it easy for money to just
slip through our fingers. The first step is to create a list of STATIC
EXPENSES -- things that cost the same amount every month, like rent and
your car lease and student loan payments. Now these expenses are not
completely "static" in the strictest sense of the word. You can reduce
your rent or mortgage payment by finding a less expensive house -- and you
could increase your loan payments to get rid of the debt faster. But for
now, just itemize your regular monthly costs.
Next, you want to evaluate your VARIABLE EXPENSES -- those costs that
fluctuate from month to month. Groceries, entertainment, utilities, and
clothing all fall into this category. The great thing about variable
expenses is that you control (at least to a certain extent) how much of
your budget these items eat up. But some of these costs come in large and
unexpected chunks -- like car repairs and medical bills. So you might need
to go through your last 12 months' credit card and bank statements to get
a clear idea of how much daily life costs you. And don't forget about
those expenses that are paid only intermittently -- like insurance. Tally
each expense and divide the total by 12, to give you a clearer idea of how
your costs spread out over a year's time.
ROOT OUT MONEY LEAKS
Now I guarantee that you will not remember every expense, no matter how
hard you strain your brain! Think about all of the things that you buy
throughout your week without really paying attention -- snacks at work, a
magazine when you stop for gas, that cup of coffee on your way in every
morning. And don't forget about the expenses you are racking up because of
financial disorganization -- interest charges on your credit card debt,
late fees because you forgot to return that movie on time, overdraft
charges because you didn't balance your checkbook. All of these fall into
the category of unconscious spending. You just do it because it's a habit.
And although you think that a dollar here or fifty cents there is
insignificant, it can really add up.
So for a month, record every penny that leaves your hand, in the form of a
check or cash or a credit card transaction. This may sound like a huge
challenge, but you can do it! Make it convenient -- my husband stuck a
small pencil and piece of paper in his wallet so he would be reminded to
make a note every time he made a purchase. You will be stunned when you
see where your money is really going! My husband was shocked to find out
that he was spending almost a hundred dollars a month on that morning
coffee (am I picking on Starbucks too much?!) What's your vice -- eating
out when you are feeling lazy? Buying every new CD or magazine that comes
out? I'm not suggesting that you completely eliminate these habits -- just
that you decide how often you can reasonably afford to indulge and still
reach your other financial goals.
DON'T FORGET YOUR DEBTS
It's also important that you have some idea of your liabilities -- debts
that still have to be repaid. Did you figure these payments in with your
monthly expenses? If you are only counting the minimum monthly payment,
you will never pay your debts off. You may not be able to do it right now
-- but after we get your budget in order, the goal is to pay at least
double the minimum amount on at least one of your liabilities each month.
You should start with the credit card or loan that has the highest
interest rate -- then tackle the next highest after the first debt is paid
off. And if you can afford to pay more than double, go for it. You aren't
really free to start working on other financial goals until you know you
are debt free.
TALLY UP YOUR INCOME
Do you really know how much you make? The tendency is to quote whatever is
printed on your employment contract -- to say, "I make _____ a year." But
after taxes and Social Security and any other items that are deducted from
your check, what are you actually bringing home? Take a minute to really
examine all of your sources of income and calculate an honest total -- you
can't have a realistic budget without it!
WHAT'S THE VERDICT?
So, comparing income to expenses, how does it look? If you came out in the
black, congratulations! How much do you have left over? Regardless of how
small or large the amount is, start stashing it away into savings and
investments! Your choice of how to proceed will depend on your financial
goals -- investing for retirement will involve less liquidity and more
risk than just saving for next year's vacation. The main thing to remember
is that you should build your savings and investments into your budget
just like a bill -- and take care of these long-term responsibilities
FIRST, before other costs. That's the secret to good financial management.
Now, if you ended up in the red, we need to talk. The first step is to
look at spending which can be reduced or even eliminated. Start by
examining those "spending leaks" -- if they give you pleasure and
satisfaction, dandy. Certainly late fees and interest charges don't fall
into this category! But you can still overdo a good thing.
Ask yourself if eating out 4 times a week gives you 4 times more pleasure
than doing it just once. And could you get as much pleasure if you cooked
a good homemade meal? Is the ridiculous mortgage on that 10,000 square
foot house worth it? Or could you be just as happy (or even happier with
less financial stress) in a place half the size? Also look for convenience
expenses -- things that we spend money on because we are overwhelmed, too
busy, or just worn out.
Perhaps by re-evaluating how you use your time, you might discover that
many of these expenses are just symptoms of misplaced priorities. When you
arrive at a place where all of your spending decisions are DELIBERATE
ones, you will find yourself several steps and quite a few dollars closer
to a balanced budget that allows you to reach all of your financial goals.
Ramona Creel is a Professional Organizer and the founder of
OnlineOrganizing.com -- a web-based one-stop shop offering everything that
you need to get organized at home or at work. At OnlineOrganizing.com, you
may get a referral to an organizer near you, shop for the latest
organizing products, get tons of free tips, and even learn how to become a
professional organizer or build your existing organizing business. And if
you would like to read more articles about organizing your life or
building your business, get a free subscription to the "Get Organized" and
"Organized For A Living" newsletters. Please visit
http://www.OnlineOrganizing.com or contact Ramona directly at
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Budget the Luxuries First!
Strictly speaking, his advice was preceded by another Heinlein maxim as
well. "Sovereign ingredient for a happy marriage: Pay cash or do without.
--
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