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Making a Budget
Making a Budget
Get the most out of every dollar.
1) Budgets are a necessary task.
They're the only practical way to get a grip on your spending so that
you can make sure your money is used the way you want it.
2) Creating one generally
requires three steps.
a)
Identify how your money is being spent.
b)
Set goals that take into account your financial objectives.
c)
Track your ongoing spending habits to make sure they are staying within
those guidelines.
3. Use software to save paperwork.
If you use a personal finance program such as Quicken or Microsoft
Money, the built-in budget-making tools can create your budget for you.
They are excellent at keeping track of your ongoing expenses and will
also be easier if you bank online.
4. Watching your pennies.
Monitoring your spending by computer encourages attention to detail,
which is where you have been lax. Or you wouldn’t be reading this, now
would you? Determine which categories of spending can and should be cut
(or expanded), concentrate on those categories.
5. Your petty cash fund.
If withdrawals from the ATM machine evaporate from your pocket without
apparent explanation, this is another area of concern! Keep a careful
record of petty cash expenses to find out where that money is going.
6. Spending beyond your limits?
If so, you've got plenty of company. Government figures show that many
households with total income of $50,000 or less are spending more than
they bring in, thanks to the liberal availability of credit. This
doesn't make you an automatic candidate for bankruptcy, but it's
definitely a sign you need to make some serious spending cuts.
7. Is it a luxury or a necessity?
If your income doesn't cover your costs, then some of your spending is
probably for luxuries, even if you consider them to be filling a real
need. Just ask yourself, do I really need it?
The joy of budgeting
Most people would rather stick pins in their eyes than
draw up a budget. But, it’s not all that bad!
If
you're the type of person who always has plenty of cash, knows exactly
where every penny goes and never has trouble paying bills, skip this
chapter. You're either too rich or too smart to need it!
For the rest of us, unfortunately, making and sticking to a budget is
the elemental tool for ensuring that your money gets used the way you
want it. And even if you're in the happy situation of having plenty of
income, the homework involved in drawing up a budget can be instructive
since you may find that you are spending more than you wish on items
like music CDs, electronic gadgetry or restaurant meals.
It’s time to look at your foolish spending habits square in the face.
One of the chief impediments to budgeting is that most people would
rather not know how they really use their money. It's bad enough to
learn this kind of information on your own. It's even worse when a
spouse or significant other finds out, since it usually confirms his or
her worst fears.
However unwise you are about spending your money, others are likely to
be just as foolish in their own way. Moreover, the pain of budgeting
comes mostly at the beginning. After you have a budget in place, and
you've fine-tuned it with a couple of months of actual spending, then
tracking your expenditures becomes almost automatic. If your boss at
work were to ask you for an analysis of the department's spending,
you'd figure it out quickly enough. Budgeting your household should be
approached in the same businesslike fashion. And there are a variety of
ways that electronic tools can help make the process easier.
Listing expenses
Building
a realistic budget, start by figuring out where your money goes.
If you happen to use Quicken, Microsoft Money or other
such software, you're in luck. These programs generally make it easy to
draw up a budget and monitor compliance.
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Quicken, for
example, every time you make a deposit, write a check, pay a
credit card bill or send an electronic payment you are asked
to assign it to a particular category, such as "salary,"
"clothing," "groceries," "child care" or "health insurance."
You can also create subcategories, dividing "auto" expenses
into "fuel," "insurance" and "service." The program comes
with a set of categories that handle most of the basics. |
You can edit the
list to create categories that make better sense for your particular
household. And if you're away from home,
In you can track expenses at the Quicken
website and then download the transactions to your hard disk later.
The drawback, of course, is that entering and categorizing all of your
income and outflow is very time consuming.
If you don’t have a computer, you can still get a good handle on your
spending the old-fashioned way. Start by getting all your records
together from the last 12 months, including your bills for utilities,
Mortgage/Rent, transportation, food, and miscellaneous monthly bills.
Once
you have this information, you will be able to get a clear picture of
where you can start cutting back on your spending! This format that you
have created will allow you to be able to make copies for each month.
Cutting costs
Freeing
up money for use elsewhere.
The
most common spending problems are caused by a house that's too large, a
car that's too luxurious, or a credit card-charged lifestyle that's too
lavish for your income. Whatever your situation, here are some common
ways that people can reduce their monthly bills.
Eliminate trivial but needless costs.
Look first for small savings, not because they'll end your budget
problems, but simply because they're easy to find and take advantage
of. For example, cut-out the mid-afternoon Danish or caffé latte. Shop
for clothes and household furnishings only during sales or even at
thrift stores. Keep your house warmer in summer and cooler in winter.
Take on chores that you usually pay someone else to perform, such as
mowing the lawn, shoveling snow. If you're mechanically inclined,
perform your own car repairs, like changing the oil.
Reduce larger expenses.
These recommendations are decidedly more painful. If you smoke, for
instance, quit. Don't buy season tickets to anything. Drop health-club
memberships; a pair of jogging shoes and a set of weights seldom cost
as much as annual dues at a gym. Plan smaller/cheaper vacations. Trade
in your luxury car or sport utility vehicle for something a lot cheaper
to buy, fuel and maintain (we said this was painful). Re-think your
living quarters and move to some place less expensive, if it's
warranted.
Okay, on the assumption that those kinds of changes may be too
wrenching, here are some other specific areas where many people can
find savings:
Refinance your mortgage.
If new mortgages are costing at least two percentage points less than
the rate you're paying, refinancing may save you significant dollars.
Cut your taxes.
Usually this means taking better advantage of itemized deductions, and
it's a lot easier to do if you are either self-employed or have some
income from work you do outside of a regular job. That opens up a range
of new deductions, from expenses for work-related items to a home
office that are much harder to claim if you're an ordinary working
stiff. If you do plan to claim some of these, the work you did in
categorizing your expenses will pay off by making record-keeping
easier.
On the investment side, you can save some money by selling and then
writing off investments that have lost money. You can use such losses
to offset any gains you may have in a given year. And if your losses
outweigh your gains, you can deduct as much as $3,000 of investment
losses from your ordinary income each year. Those with higher incomes
may also be able to save some money by shifting money out of taxable
bonds into tax-free municipal bonds. Whether this makes sense depends
on your tax bracket (usually you need to be in the 31 percent federal
bracket or higher) and the spread between taxable and tax-free bonds.
One last caution:
Over time, your income should rise as your career progresses and you
manage to save money for investing. But, also over time, inflation will
raise the cost of living. A mere 3 percent annual rise in prices will
double the cost of everything within 24 years. At that time, you'll
need twice as much money as you do today to live as well as you do now.
So don't start spending your rising income on luxuries you've been
denying yourself until you're sure that you're staying ahead of
inflation.
Setting goals
Next you should analyze your spending habits to see
where you need to make changes.
This
is especially urgent, obviously, if your budget investigation shows
that you are paying out more than you are making! That's a scary
position to be in! But it's surprisingly common. In fact, the Labor
Department numbers show that many families making about $50,000 or less
are spending at least a few percentage points more money each year than
they actually derive in revenue.
That doesn't mean that they or you are headed for bankruptcy, though
bankruptcies have risen steadily in recent years. Instead, it reflects
the fact that Americans are in the habit of borrowing to cover both
short-term expenses, like those on credit cards, and long-term ones,
such as buying cars and homes. If your one where your spending exceeds
your income, then your top priority in constructing a budget should be
to slash your spending, pronto. The guiding principle here is that if
your income doesn't cover your costs, then some of your spending is
probably for luxuries, even if you've never thought of them as such.
If your household runs in the black, you may still want to reallocate
some of your spending.
In some cases, a divergence will be perfectly reasonable. The average
family spends only a few percent of its income on education, for
example. But if you've got a child in college or private school, or are
taking courses yourself, your spending will be a lot higher and more
power to you. On the other hand, if you're spending twice as much as
the average family on meals away from home, and there's no obvious
reason why that should be so, you may want to consider eating in more
often.
When projecting your income, don't include money that you can't be sure
to receive, such as highly variable year-end bonuses, tax refunds,
gains on investments or gambling winnings. Instead, wait until the
extra cash arrives, then save or invest it to produce more revenue for
the future. (Caveat: In professions for which the year-end bonus is a
reliable part of the income, budget for the lowest reasonable bonus and
treat any overage as windfall.)
Your goal should be to reduce your spending to about 90 percent of your
income, with the aim of plowing the rest of that money into the
financial objectives you set for yourself. Once you've set your budget
goals, you need to develop the habit of tracking your expenses on an
ongoing basis. Something that's most easily accomplished using
personal-finance software. The aim here is to make sure the spending
stays within the limits you've set, naturally. But there's a second
aim: Very likely you will discover that some of the goals you set were
unrealistic. If so, adjust them. No point in giving yourself an
unreachable hurdle. Often it takes two or three revisions before you
achieve a budget that you can really stick to.
Making a Budget
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