Building a Budget Now is the time! Building a Budget Now is the time!
By Homeminders Expert - Brian O’Connell
In today’s market, many homeowners are tightening their “purse strings.” The importance of discovering what wealth means to you, and, more importantly, to come to a realistic conclusion about what you need to do to put yourself on a path to a favorable financial future is more important then ever.
A key step in getting a grip on reality is by creating—and following—a personal budget. By doing so, you’ll develop not only a blueprint to gauge how well you’re doing on the financial front, but also to move you from the Spender category to the Saver category. Business and finance guru Michael Masterson has some key advice for us all. “To become wealthy,” he writes, “first you need to build a small nest egg by spending less than you earn. Simple, right? But not if you don’t have the self-discipline to do it.”
Not Your Father’s Economy Anymore
The point is that if you want to get serious about building or protecting your financial portfolio, you’re going to need think and act smarter.
Finding that initial investment money has become a challenge these days. In an era where consumer spending has been high, there are plenty of new goods and services to buy that weren’t available even 20 years ago, knowing how to budget properly is a big key to your financial success. According to a recent American Express consumer survey on everyday spending, today's list of typical, day-to-day expenses is still dominated by traditional items such as groceries, fast-food lunches, tolls and gasoline. But they've been joined by such 21st century wallet-sappers like cellular phone service, paging fees, and Internet service costs.
Consequently, as everyday expenses increase, managing a household budget becomes more complicated. What’s the best solution? Get those costs into your budget as soon as possible. You need to set a budget for everything, because people tend to spend whatever money is left over after the fixed expenditures—and stop only when either the ATM won't give them more cash or the bank calls.
You probably won’t get rich by saving $5 or even $10 every day, but that’s not the real point with a household budget. Think of it instead as a living, breathing document that’s going to turn you from a Spender into a Saver, and put you on the path to long-term wealth creation.
Before we get into specific areas of your budget, let’s take a brief look at how a normal household budget works.
Primarily, all budgets are divided into Income and Expenses sections, but most good ones now include a third component for Savings. Items in the Income section can include after-tax salary, pensions, investments, and tax refunds. Items in Expenses or Expenditure section can include rent, mortgage payments, food, gas, utility bills, childcare, entertainment, gifts, and holidays. The Savings section logs how much you put away each month, after satisfying spending requirements. As much as 10% of total expenses should be put into this category to allow for unforeseeable events, such as dental or child-related emergencies.
Your Budget List
Here are some more tips on building a better budget:
- Don't make your budget too restrictive. Otherwise, you might lose interest.
- Use precise figures, not just estimates, so you know at any point exactly how much you need or have.
- Consider using an Excel spreadsheet with 2 primary components--Income and Expenditure.
- Set up easily-understood budget sections. For example, include contractors and housepainters under Home Expenses. Better yet, paint the house yourself to spend less money.
- Don’t underestimate what you spend. Figure in lunches that you eat in restaurants, movies—including Pay-Per-View at home, and other “extra” expenses.
- Create and manage your budget on a monthly basis. Or, you might build a budget based on how often you get paid.
- Review your budget on a quarterly basis for accuracy, and also to see how you’re doing.
- When and if the economy enters a low-interest rate period, take advantage of low interest rates to refinance a home mortgage and make lower monthly payments. Numerous Web sites offer instant calculators that can estimate your new payments, including Quicken.com and Realtor.com.
- Review auto and home insurance rates and comparison shop for better values. Some companies offer discounts you might not be aware of, such as those for senior citizens, multiple policies, or autos with anti-theft devices. Consider raising deductibles, too, in exchange for lower payments.
- Add up the fees on your bank statements and shop for a better deal or ask your existing bank about lower-cost accounts. While you're at it, find out if your employer can automatically deposit your paycheck to your bank account, to minimize the risk of bounced checks and other mishaps. Consider starting an automatic savings plan to route some money directly to a separate account before you're tempted to spend.
- Obtain an estimate of your future Social Security income by calling (800) 772-1213. Ask for a Personal Earnings and Benefits Statement request form. The response time is quick, and it's a good opportunity to make sure your employment history is reflected accurately.
- Order a copy of your credit report for $8 from reporting agencies Equifax (800) 685-1111), Trans Union (800 916-8800), or Experian (800 422-4879).
- Get rid of clutter and raise extra cash by holding a garage sale or get a tax deduction by donating unwanted items to charities. In that case, be sure to keep an itemized receipt of donated goods in case the IRS has questions.
- While lending is tight, taking out one manageable loan to pay off debts can often lower your cost of borrowing, particularly for credit cards. Interest rates on credit cards are usually much higher than traditional consumer loans. You have to stop overspending though or you’ll just continue the pattern.
Adding it Up
When you have filled in the sections of a budget table with income and expenditure sections relevant to you, simply make totals of expenditures including savings and investments, and income, and subtract the expenditures from income. If your total is above zero, you are cashflow positive. If the total is below zero, you are cashflow negative. If the total is zero, you are cashflow neutral.
If you end up with a positive cashflow, you can then consider investing the surplus, preferably in stocks or mutual funds. Or, you can spend it. If you have a negative cashflow, you should examine what non-essential items you can eliminate.
The most common problem people have with budgets is sticking to them. Individuals who aren't very organized by nature need to have a more flexible budget, with broader categories such as "rent, entertainment, groceries and bills" under expenses, rather than more detailed entries.
Dealing with Debt
If you’re struggling with debt, don’t beat yourself up over it. Just because you have debt, either a large amount or a small amount, doesn’t make you a bad person. Like death, taxes and your relatives, you can’t really avoid debt—but you can manage it.
One way to attack your debt is to use what some debt counselors refer to as “the snowball method.” Using this strategy, simply list your debts in ascending order, with the smallest remaining balance listed first, the largest last. Do this regardless of interest rate or payment. Using this method, you will pay these off in this new order. This works because you get to see some success quickly and are not trying to pay off the largest balance just because it has a high rate of interest.
Once you pay off the smallest balance, take that payment and combine it with the next payment on the list, so that each month you're making a larger payment on that debt. Repeat the process, again and again, so that your payments are getting larger, your debts are being paid off faster, and the process starts to snowball until all your debts are paid.
If you’re one of those people who can’t sleep at night worrying about bigger bills, go ahead and address those bills first. Just rank your debts in order of highest interest rate to lowest. Then whittle away at them in that order. Make sure you are not comparing apples and oranges. The effective interest rate is often different from the nominal rate quoted by the lender. For example, mortgage rates are compounded semi-annually, while rates on credit card debt are usually compounded monthly.
The last word on your budget: When you first start your budget, you should review it every pay period to see if you're on track. After that, review it when you check your income and expenses—that should be done every month.