Having spent some time tracking your cash spending, you now have a lot of information on how you spend your money. Now it's time to start fitting the pieces together.
I'm assuming you're putting together a budget at least in part because you aren't happy with your current financial situation. Maybe you're getting deeper and deeper in debt and you're need to know why. Maybe you're just coming up a bit short every month and you'd rather break even. Or maybe you have enough to live on, but you'd like to put some money into savings. A budget is a great tool to help you towards your specific goals. I'm going give you suggestions on what you should do with all this information, but feel free to do things differently if that better fits your situation.
I suggested at the beginning of this series that you start by putting your income and your checking and credit card expenses on a monthly basis. Do the same with your cash purchases. Months vary in length, so a good formula is to count an average month as 4.3 weeks.
Add your reliable income sources up to create a monthly total. Is it what you expected? Are you sure you've included everything? Did you leave out income that you can't really count on, such as certain types of bonuses and commissions?
Then add up your "must pay" and unalterable expenses, which basically are income and property taxes, plus any court-mandated payments such as alimony, child support or judgements you must pay. These are checks you must write each month.
Next comes what I call "semi-discretionary" expenses. These are items that are difficult but not impossible to change. Mortgage or rent payments, basic utilties (this does not include cable or satellite TV!) Health, life and car insurance, car payments, landline phones, day care expenses, credit card payments, car maintenance and so forth.
Next comes "discretionary expenses." These are things you can change relatively easily. Food,clothing, entertainment, vacations, furniture....
When you've placed everything in a category, add up all your monthly totals and compare that to your income. Hopefully, subtracting your expenses from your income leaves a postitive number. If not, and increasing income is not an option, it's time to start looking at how you can cut your expenses. How big is the deficit? A few bucks short each month is an easy fix, but a significant amount will require some serious changes. Again, only you can determine what your needs are.
This is why I suggested you sort your expenses into the categories above. If, for example, you need to cut expenses by less than 10%, its time to start looking at ways to ease off on your discretionary spending. (You'll find some suggestions on this blog.) For example, you might start checking out books and videos from the library instead of buying them, or drop to a lower tier on your cable. If you find that you're spending a lot of money dining out, start eating at home more often or taking lunch to work. If you have a lot of overcharges on your cell phone, check for a better "unlimited" deal...or figure out a way to use your phone less! The savings from a few changes like this might be enough to get you back into the black.
If you're in real trouble, though, you may need to go to the "semi-discretionary" items. It may be time to trade your gas guzzler for a good, used gas-sipper, or if you have two cars, see if you can get by with one car and public transport. (Remember, one less car also means less insurance and maintenance costs.) If deeper cuts are necessary, can you move to a cheaper apartment or smaller house? (Check what expenses may be involved before making this decision.)
Talk with your family to come up with ideas. It's best not to play the "blame game" but instead work together to see who can cut what. If everyone can pitch in, it will be much easier to reach your goals. Good luck!
Showing posts with label Budgeting. Show all posts
Showing posts with label Budgeting. Show all posts
Monday, August 25, 2008
Friday, August 08, 2008
Budgeting, Part III
In the first two parts of this series, you've been gathering information that should be creating a picture of your spending habits. By listing checks and credit card purchases by amount and category, you should at this point have a fairly good idea of where much of your money goes each month.
This can be very revealing. You may be surprised to find how much you're paying for utilities, or how much car maintenance costs over a six-month period. You may find that your video rentals add up to a surprising amount , or that you haven't been spending as much on clothes as you thought. At this point, try not to draw any hard or fast conclusions. And don't start pointing fingers at anyone in the family. Almost everyone spends in a way that others may not agree with, but try not to be judgmental. Once you have all the information, it will be time to see where you can save without feeling deprived.
Now...it's time to find out where your cash goes.
The only way to do this is to have everyone keep a diary for a few weeks, one in which you note down everything you pay for with cash...and I do mean everything. If you look at MoneytoSpare.net's sidebar feature, How Much Could You Save? you'll see some examples of how spending small amounts of cash can add up. (Click on the header image.) So noting down the small stuff is important.
Get everyone a small notebook they can tuck in their pocket or purse. Start writing down everything you pay cash for: the coffee and donut you buy at the drive-through on your way to work. The cash tip you leave at lunch, the cash tip you give your hairdresser. The $30 you drop in the collection basket at church. The sodas you get out of the vending machine at work. The cost of your Saturday movie tickets...and the cost of your popcorn and soda. The newspaper you buy each morning. The drink you have on your way home each night. The candy bars you buy at school. The candy bars you buy at the convenience store.
Keep track of it for at least two weeks (a month is better) and then put these amounts into your categories, but add an additional label: Cash. When you've done this, it's time to starting using this information to improve your finances. We'll talk about that in Part IV.
This can be very revealing. You may be surprised to find how much you're paying for utilities, or how much car maintenance costs over a six-month period. You may find that your video rentals add up to a surprising amount , or that you haven't been spending as much on clothes as you thought. At this point, try not to draw any hard or fast conclusions. And don't start pointing fingers at anyone in the family. Almost everyone spends in a way that others may not agree with, but try not to be judgmental. Once you have all the information, it will be time to see where you can save without feeling deprived.
Now...it's time to find out where your cash goes.
The only way to do this is to have everyone keep a diary for a few weeks, one in which you note down everything you pay for with cash...and I do mean everything. If you look at MoneytoSpare.net's sidebar feature, How Much Could You Save? you'll see some examples of how spending small amounts of cash can add up. (Click on the header image.) So noting down the small stuff is important.
Get everyone a small notebook they can tuck in their pocket or purse. Start writing down everything you pay cash for: the coffee and donut you buy at the drive-through on your way to work. The cash tip you leave at lunch, the cash tip you give your hairdresser. The $30 you drop in the collection basket at church. The sodas you get out of the vending machine at work. The cost of your Saturday movie tickets...and the cost of your popcorn and soda. The newspaper you buy each morning. The drink you have on your way home each night. The candy bars you buy at school. The candy bars you buy at the convenience store.
Keep track of it for at least two weeks (a month is better) and then put these amounts into your categories, but add an additional label: Cash. When you've done this, it's time to starting using this information to improve your finances. We'll talk about that in Part IV.
Friday, August 01, 2008
Budgeting, Part II
Now that you have a handle on your income, it's time to start talking about your spending.
Gather up enough of your check registers to span six months. This will help you average out seasonal fluctuations, such as the costs of A/C in the summer and heating in the winter. If you put a significant number of purchases on credit or debit cards, collect six months worth of statements for each card, or if you don't have those and your card issuer is a local bank or credit union, see if they'll print you out the same information.
Then sit down and start examining how you spend money.
Start with your mortgage or rent payment, since that's the same each month. Note it down on a separate sheet.
Then look at your utility payments. Take six months worth of electric bills, for example, add them up and divide by six for a monthly average. Make it easier on yourself by rounding the amounts up a bit (always round expenses up, remember?) Each time you write down a figure, highlight it on your check register or credit card statement so you won't count it twice.
For example:
You wrote the following checks for your electric bill: Aug. $276.57...September, $188.34...October, $165.66...November, $198.60...December, 245.89, January...$222.78.
On your work pad, just write down: $280, $190, $170, $200, $250, $225.
Total those figures--$1,315--and divide by six for a final figure: $219.16, which you round up to $220.
Mark it down on the same sheet as your mortgage: Electric bill: $220.
Do the same for your gas bill, your water bill, your telephone bill, your cell phone bill, etc. The highlighting will make this easier as you go along. Many of your checks will be for things you pay each month, some will be for things you pay quarterly or even yearly. Simply calculate them all on a monthly basis. (If like most of us, for example, you pay federal income taxes once a year, divide that figure by 12.)
Soon, you'll have a list of items, each with an amount:
Mortgage
Electricity
Phone
Water
Cell Phone
Heating Oil
Clothing
Food
Credit Card #1
Credit Card #2
Car Loan Payments
Cable TV
Car Insurance
Taxes (IRS)
Gifts
Car Repair
Toys
Cable TV
Groceries
Gas
and so forth.
Slowly work your way through your check registers and card statements. Some things may not fall into easy categories. List them individually, but make sure you list everything.
Remember, there's nothing that says you have to finish all this in one session. Do it bit by bit if you like. The highlighting will make sure you don't include any thing on your work list more than once.
Doing this can be interesting. After while, patterns will start to emerge. You will probably be surprised by how much--or how little--you spend on certain items, or the wide range of things you buy.
Don't forget to include things you only pay once a year. (Check another six months of your check register if you need to.) Car registration? Property taxes? Charity donations?
Again, just round them up slightly to whole numbers.
What about things you pay for in cash? We'll get to that in Budgeting, Part III.
Gather up enough of your check registers to span six months. This will help you average out seasonal fluctuations, such as the costs of A/C in the summer and heating in the winter. If you put a significant number of purchases on credit or debit cards, collect six months worth of statements for each card, or if you don't have those and your card issuer is a local bank or credit union, see if they'll print you out the same information.
Then sit down and start examining how you spend money.
Start with your mortgage or rent payment, since that's the same each month. Note it down on a separate sheet.
Then look at your utility payments. Take six months worth of electric bills, for example, add them up and divide by six for a monthly average. Make it easier on yourself by rounding the amounts up a bit (always round expenses up, remember?) Each time you write down a figure, highlight it on your check register or credit card statement so you won't count it twice.
For example:
You wrote the following checks for your electric bill: Aug. $276.57...September, $188.34...October, $165.66...November, $198.60...December, 245.89, January...$222.78.
On your work pad, just write down: $280, $190, $170, $200, $250, $225.
Total those figures--$1,315--and divide by six for a final figure: $219.16, which you round up to $220.
Mark it down on the same sheet as your mortgage: Electric bill: $220.
Do the same for your gas bill, your water bill, your telephone bill, your cell phone bill, etc. The highlighting will make this easier as you go along. Many of your checks will be for things you pay each month, some will be for things you pay quarterly or even yearly. Simply calculate them all on a monthly basis. (If like most of us, for example, you pay federal income taxes once a year, divide that figure by 12.)
Soon, you'll have a list of items, each with an amount:
Mortgage
Electricity
Phone
Water
Cell Phone
Heating Oil
Clothing
Food
Credit Card #1
Credit Card #2
Car Loan Payments
Cable TV
Car Insurance
Taxes (IRS)
Gifts
Car Repair
Toys
Cable TV
Groceries
Gas
and so forth.
Slowly work your way through your check registers and card statements. Some things may not fall into easy categories. List them individually, but make sure you list everything.
Remember, there's nothing that says you have to finish all this in one session. Do it bit by bit if you like. The highlighting will make sure you don't include any thing on your work list more than once.
Doing this can be interesting. After while, patterns will start to emerge. You will probably be surprised by how much--or how little--you spend on certain items, or the wide range of things you buy.
Don't forget to include things you only pay once a year. (Check another six months of your check register if you need to.) Car registration? Property taxes? Charity donations?
Again, just round them up slightly to whole numbers.
What about things you pay for in cash? We'll get to that in Budgeting, Part III.
Sunday, July 27, 2008
Budget : A Very Misunderstood Word
Say the words "budget" and people tend to groan, flinch and attempt to flee. It's a word that's been unfairly saddled with a number of negative connotations, including the idea that it's a tedious, complicated procedure only a math whiz can handle and only poor people have to attempt.
But budgeting is actually only another financial skill, one that helps you have control of your money. Far from being the last resort of the financially feeble, it's a skill that helps the largest companies in the world be successful. I guarantee you, Wal-Mart budgets. Microsoft budgets. Exxon/Mobil budgets. And most of the billionaires out there attained that status at least in part by knowing exactly how and where they spend their money. For those who are struggling financially, budgeting may take a little time and effort, but it's the best way possible to find out why you're always short on cash.
Still don't like the term budget? Don't want to tell friends and family that you're working on one? Then use the term "financial planning" with my blessing, because they're essentially the same thing. I'm going to use the word "budget" in this article because it's easier to type. (I'm not lazy, I'm just busy!)
So how does a person budget?
One thing you don't need is budgeting software. ( In fact, you don't even need a computer.) Budgeting is nothing you can't handle with a yellow pad, a few sharpened pencils, a highlighter and a $3 calculator. If later you want to load everything into a software program, feel free....but don't be like some people and use "no time to learn a software program" or "can't afford a software program" as an excuse to not budget.
(And by the way, the initial "figure out income and expenses" job described below isn't something you have to do in one session. Spread it out over a number of days if you need to.)
So...you have your calculator, a highlighter, some ruled paper and pencils. The first job? Determine your income. You want to collect your paycheck stubs, past-year income statements if you're self-employed, plus information on any bonuses or commissions you receive on a regular, predictable basis. Why the emphasis on regular and predictable? Because you don't want to base your budget on income that may not show up, or may be significantly less than your estimate. Also add in income from such sources as Social Security, fixed-amount annuities or rental income....anything you get on a regular, steady, you-can-count-on-it basis.
Now, because your main living costs are monthly--specifically rental or mortgage payments, loan payments and utilities--convert all these sources of income to a monthly basis. For example, if you get a biweekly paycheck, multiply that amount by 26 weeks (the number of paychecks you get per year) then divide by 12. Income that you get quarterly should be multiplied by 4 to get a yearly figure, then divided by 12 and so forth.
When you're calculating all these figures, make things a little easier on yourself by rounding the figures down slightly. (Always round income down and expenses up.) For example, if your biweekly paycheck is $1,379, multiply it by 26 to get $35,854, then divide that by 12 to get a monthly figure of $2987.33, which you round down to $2980.
Another example: If you have a rental property that nets you $6,820 yearly, divide by 12 to get a monthly figure of $568.33, then round that down to $560. If you always get a yearly bonus, calculate an average for the last five years, divide by 12, round down and add that. Do the same for your spouse's income.
When you're finished, add up all your monthly figures and, again, round down. I suggest you double-check this figure, especially if its either significantly higher or lower than you expected. (Especially if its higher!)
Next, comes expenses, a figure that usually takes a bit more effort to compile. We'll talk about that in Part II.
But budgeting is actually only another financial skill, one that helps you have control of your money. Far from being the last resort of the financially feeble, it's a skill that helps the largest companies in the world be successful. I guarantee you, Wal-Mart budgets. Microsoft budgets. Exxon/Mobil budgets. And most of the billionaires out there attained that status at least in part by knowing exactly how and where they spend their money. For those who are struggling financially, budgeting may take a little time and effort, but it's the best way possible to find out why you're always short on cash.
Still don't like the term budget? Don't want to tell friends and family that you're working on one? Then use the term "financial planning" with my blessing, because they're essentially the same thing. I'm going to use the word "budget" in this article because it's easier to type. (I'm not lazy, I'm just busy!)
So how does a person budget?
One thing you don't need is budgeting software. ( In fact, you don't even need a computer.) Budgeting is nothing you can't handle with a yellow pad, a few sharpened pencils, a highlighter and a $3 calculator. If later you want to load everything into a software program, feel free....but don't be like some people and use "no time to learn a software program" or "can't afford a software program" as an excuse to not budget.
(And by the way, the initial "figure out income and expenses" job described below isn't something you have to do in one session. Spread it out over a number of days if you need to.)
So...you have your calculator, a highlighter, some ruled paper and pencils. The first job? Determine your income. You want to collect your paycheck stubs, past-year income statements if you're self-employed, plus information on any bonuses or commissions you receive on a regular, predictable basis. Why the emphasis on regular and predictable? Because you don't want to base your budget on income that may not show up, or may be significantly less than your estimate. Also add in income from such sources as Social Security, fixed-amount annuities or rental income....anything you get on a regular, steady, you-can-count-on-it basis.
Now, because your main living costs are monthly--specifically rental or mortgage payments, loan payments and utilities--convert all these sources of income to a monthly basis. For example, if you get a biweekly paycheck, multiply that amount by 26 weeks (the number of paychecks you get per year) then divide by 12. Income that you get quarterly should be multiplied by 4 to get a yearly figure, then divided by 12 and so forth.
When you're calculating all these figures, make things a little easier on yourself by rounding the figures down slightly. (Always round income down and expenses up.) For example, if your biweekly paycheck is $1,379, multiply it by 26 to get $35,854, then divide that by 12 to get a monthly figure of $2987.33, which you round down to $2980.
Another example: If you have a rental property that nets you $6,820 yearly, divide by 12 to get a monthly figure of $568.33, then round that down to $560. If you always get a yearly bonus, calculate an average for the last five years, divide by 12, round down and add that. Do the same for your spouse's income.
When you're finished, add up all your monthly figures and, again, round down. I suggest you double-check this figure, especially if its either significantly higher or lower than you expected. (Especially if its higher!)
Next, comes expenses, a figure that usually takes a bit more effort to compile. We'll talk about that in Part II.
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