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Personal Finance |
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There's more to life than investing. Paying off your student loans. Learning how to save. Saving for your kids' college education. Your life leads you down the path to making many financial decisions. Here's some help seeing the road ahead.
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Budgeting
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Have you ever wondered why it can be so hard to make ends meet even if
you make a good salary? Does it seem that you and your family basically
live paycheck to paycheck? Have you ever thought, "If only I had 10%
more, then I wouldn't be so strapped?" You are not alone.
The most important point to remember in good money management is not
having more money but spending what we do have as wisely as possible.
Properly managing our financial affairs is essential to establishing and
improving our financial security. Stated differently, we need to take
charge of our money and step one is to establish a budget, the purpose of
this section.
Too often we view budgeting negatively. "Living on a budget," sounds so
restrictive and confining. Yet we should view budgeting almost as a
friend that is there to assist us not only in living within our means,
but in achieving our financial goals. A budget helps determine how our
money gets spent and it helps us spend it more effectively.
A budget is really a spending plan and there are many reasons to have
one. Some examples include:
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To determine how you spend your money. Many of us really don't
know.(1)
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To help us live within our means with the income we have.
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To meet financial goals such as paying off credit card debt or car
loans, saving for a new car or a down payment on a home, education
for our children or for retirement. Making progress in meeting
these financial goals can motivate us to accomplish other financial
and personal goals as well.
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To make the best use of the money we have. Budgeting reveals
wasteful spending habits such as impulse buying.
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To inform family members why spending is being limited in one or
more areas.
HOW TO GET STARTED
A. Determine How Your Money Is Spent
In order to establish a budget or spending plan, first you have to
determine how you are spending your money. Read on.
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For a month or two, record every cash payment you make. Be sure to
record those little expenses such as buying a sandwich for lunch,
getting a haircut or getting your car washed. Such a detailed list
will show where all your ATM withdrawals are going. Don't change
your spending practices during this time. Just record all your cash
payments, which will enable you to create a picture of your
spending. The results may surprise you.
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Also review your checkbook and credit card statements for the past
six months. Many of the expenses will be regular monthly payments
such as utilities, car payments, mortgage or rent payments,
groceries, etc. Other expenses will be occasional payments such as
insurance premiums, clothing, vacations, car repairs, property
taxes, doctor/dentist bills, etc.
You want to review your credit card statements to assist you in
recalling what you purchased.
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At the end of two months, you now have an excellent picture of how
you spent all the cash you withdrew from the ATM machine. You also
have identified your other purchases and payments made by check or
credit card for the last six months.
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The next step is to categorize all these disbursements in a
detailed list using two categories: fixed expenses and variable
expenses.
Fixed expenses are ones that must be made monthly or regularly
such as quarterly and include car loan payments, gasoline and
regular maintenance for the car, mortgage or rent payments,
property taxes, federal and state taxes, insurance premiums,
current education expenses such as school tuition and utilities. It
has been estimated that the average American spends about 70% of
their income on fixed expenses.(2)
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Variable expenses are ones that we have more control over as to
when, whether or how much we spend. There are numerous examples
including expenses for groceries, meals eaten out, recreation and
entertainment, savings and investment, professional financial
services such as a financial advisor or attorney, interest on
credit card debt, home furnishings, tools and sporting goods, books
& magazines, beauty salon, cable television, pets, haircuts,
gym membership, gifts, contributions to church or other charities,
vacations, car and home repairs, and so on.
The more detailed your list, the more information you will have on
your spending practices.
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It is necessary to assume that the payments made in cash during the
one or two months you tracked them continue for the full six-month
period.
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And don't forget to include as expenses federal, state and any
other taxes withheld from your earnings such as Social Security and
amounts added to savings via payroll deduction such as a 401(k).
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Total all the fixed and variable expenses and now you have a clear
picture of your spending habits over a period of six months.
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