Budgeting Tips
Reasons to Budget
Budgeting, like balancing your checkbook, is one of the few unpleasant details that come with being an adult. For many people, the word "budget" has a negative connotation. Budgeting has gotten a bad, even unfair reputation over the years as being a difficult task. Hopefully, the following tips and pointers will give you the courage and confidence to tackle the job of successfully controlling your financial future through everyday management. Instead of thinking of your budget as financial handcuffs, think of it as a way to achieve financial success. It really doesn’t matter how much money you make or whether you are paid hourly or with an enormous salary. A budget is the first and most critical step taken towards making your money work for you instead of letting it control you and falling short of your goals. If you are not keeping track of every expense that you incur each month, you do not truly know where your money is going. Many people believe they know where it goes without keeping track of it through budgeting. To those of you who fall into this category, I would like issue a challenge. The challenge is to keep a detailed record of your outflows for one month…I’m talking all the way down to the penny. I promise you will be surprised and perhaps shocked by how much some of your "small" expenditures add up to by month’s end. If you truly want an eye‐opening experience, after the first month add up the “small” expenditures and multiply that amount by twelve (12). This will give you the expected amount over one year! This simple math problem will let you see how much you'll spend over the specified time period. What will truly make you sick is seeing how much that same amount would grow to if you invested it at various rates of return. Budgeting and tracking what is spent will give you a strong sense of where your money goes and can help you reach your financial goals. According to www.eharmony.com, the #1 reason for divorce in 2008 was “financial discord.” Since financial matters are the leading cause of marital woes and divorce, getting a handle on spending, creating and implementing a budget, as well as saving for the future will have positive effects on your relationship with your spouse or partner.
Using a Software Program
There is no need to purchase fancy software in order create a budget, although some software programs will make the task easier. For some, the ability to print (and physically hold) graphs and reports from your computer can serve as motivation to enter all the data and review the results. Most banks now offer online banking and other services for free, or for a nominal fee. You simply sign in to your personalized account; from there you can download checks that have cleared your account,
Budgeting Tips
directly into your software. Then you indicate an expense category for each check. You can perform basic comparisons on your budget versus actual expenses by category. Once you become fluent in the software you are using, you can enter more in‐depth information such as investments, assets, liabilities, etc. and print financial statements showing net income and net worth. Some of the more popular personal finance programs for tracking your dollars are Microsoft Money, Quicken, and Moneydance. Whether you decide to use sophisticated software or just good, old‐fashioned pencil and paper, the most important fact is that you begin your quest down the road to financial freedom by starting a budget today.
The Top 10 Reasons to Budget “Failing to plan is planning to fail.” ~Alan Lakein (Author, Expert on time management)
1. It’s like a road map that tells you whether or not you are going in the proper direction financially. All the goals and dreams in the world are useless if you fail to establish guidelines for reaching them and fail to measure your progress, you could end up going so far in the wrong direction that you never make it back. Can you imagine if your place of business, your church, or your children’s school system operated without a budget? 2. A budget allows you to control your money instead of your money controlling you. 3. A budget lets you know whether or not you are living within your means. Prior to the widespread use of credit cards, you could tell if you were living within your means simply by seeing how much money was left after all bills for the month were paid. The increased use of credit cards has made this much more difficult to track. Oftentimes, people just do not realize they are living far beyond where they should live until they are drowning in debt. 4. A budget will help you meet savings goals. You should always include a way to “pay yourself first” or set aside money for savings and investments. 5. Budgeting frees up any spare cash for use on needed items instead of throwing it away on unnecessary items. 6. Involving your children will help focus the entire family on common goals. 7. You will be more prepared for emergencies or other large, unexpected expenses that might otherwise be a major financial setback. 8. It could improve your marriage! Not only is a budget a spending/saving plan, it’s a major communication tool.
Budgeting Tips
9. A budget can help get you out of debt and possibly keep you from going into debt. 10. Having a sound budget will help you sleep better at night because you won’t have to lie awake worrying about how to make ends meet.
Budget Bombs; 6 Simple ways to destroy a budget
• Cutting out all of the fun stuff
Unless you are in financial distress (lost job, mounting bills, etc), you should try to keep some entertainment in your budget. Think about your recreational priorities and calculate how much is spent per month on those activities. If you find that the total is greater than 10% of your total household budget, it's probably a good time to scale back, 5% is the ideal amount to focus on. Remember, don't try to eliminate all recreation, you are more likely to blow your budget in a moment of weakness when the kids want to do something fun. • Being “hit or miss” with your savings
Slow and steady wins the race every time in managing your money. After you determine the amount of monthly income that can be allocated to short‐term (less than 1 year) and long‐term (more than 1 year) savings, make your deposits consistent by using automatic payroll deductions. By saving a mere $100 per month in a money market account earning 5% interest, you could accumulate $6,800 over five years. • Overusing debit cards
Our parents have always reminded us that money doesn't grow on trees, but our parents never had the ease and accessibility of debit cards. Ensure that you allot a specific amount of cash for purchases during the week, or you could try carrying a small amount of cash in your pocket for these minor purchases. Applying a “cash‐only diet” not only puts your spending habits in perspective, but will actually help you think before making impulse purchases. • Making minimum payments on your credit card
There's simply not a better way to waste money than to carry a balance on your credit card. Paying the minimum monthly payment will cost thousands in interest that could have been applied toward savings or entertainment. When your budget is set and you are living within your means, make a point not too overspend on your credit card each month. Have enough money set aside to pay off the credit card monthly. When large purchases are expected (i.e. Christmas), use your savings or you could be paying for this year’s gifts over the next five years.
Budgeting Tips
• Not having an emergency fund
Your parents probably told you to set aside money for a “rainy day” as they called it. This idea came from the farming community; they always wanted to have money in case crops failed to produce. If you haven’t set money aside for just such a rainy day, you're a merely a job loss or major illness away from financial ruin. The accepted rule is that you should have between three and six months' worth of living expenses in an interest‐earning account. Keep in mind that this money needs to be very liquid, you must be able to access it in a very short period of time. People who are self‐employed or work in an industry with a high turnover rate should consider having up to a year's worth of expenses set aside. • Spending more than you earn (Living outside your means)
If one bit of knowledge is gained from these tips, I insist that learning to live within your means is the most important. We live in a society of instant gratification; however, it's easier said than done. Financial management experts insist that living with less is a habit that begins with changing your spending philosophy. We all must learn to avoid reckless spending, be moderate when making purchases, and never take a vacation until you've got the money in the bank.