Creating A Realistic Budget

Budgeting – ooh, what a scary word! If you want to frighten someone whose finances are out of control, suggest that they tally up their expenses on a piece of paper. We all understand the value of such an exercise, but when it comes to the practicality of putting a budget together, we get cold feet. Budgeting doesn’t have to be so painful, when you have a systematic series of steps to follow.

As with any other area of your life, it’s pointless to start down a financial path if you don’t you have some idea of where you want to end up. What is your REASON for creating a budget? Do you want to pay off your debts? Save for your kids’ college education? Put money away for retirement? Make a list of your financial goals for the next 6 months, year, 5 years, 10, 25 – all the way through to old age. And don’t spend a lot of time worrying about feasibility – if your goal is to be debt free in a year, don’t think about all of the reasons why you won’t be able to make it by that deadline. Just remember, where there’s a will, there’s a way!

Start with either a sheet of legal paper – or a spreadsheet program – and create 12 columns. Label the top of each column with a month of the year, from January to December (duh!) Each row on your sheet will represent a different living expense – groceries, gasoline, Starbucks coffee in the morning on the way to work. You’ll have better luck remembering everything that you spend money on if you think according to categories. "Automobile" would include gas, repairs, insurance, and taxes – while "grooming" might be divided into clothes, makeup, haircuts, and facials.

How can you know what steps you need to take to reach your goal until you know exactly where you are right now? Most of us don’t have a clue where our money goes – credit cards and ATM’s make it easy for money to just slip through our fingers. The first step is to create a list of STATIC EXPENSES – things that cost the same amount every month, like rent and your car lease and student loan payments. Now these expenses are not completely "static" in the strictest sense of the word. You can reduce your rent or mortgage payment by finding a less expensive house – and you could increase your loan payments to get rid of the debt faster. But for now, just itemize your regular monthly costs.

Next, you want to evaluate your VARIABLE EXPENSES – those costs that fluctuate from month to month. Groceries, entertainment, utilities, and clothing all fall into this category. The great thing about variable expenses is that you control (at least to a certain extent) how much of your budget these items eat up. But some of these costs come in large and unexpected chunks – like car repairs and medical bills. So you might need to go through your last 12 months’ credit card and bank statements to get a clear idea of how much daily life costs you. And don’t forget about those expenses that are paid only intermittently – like insurance. Tally each expense and divide the total by 12, to give you a clearer idea of how your costs spread out over a year’s time.

Now I guarantee that you will not remember every expense, no matter how hard you strain your brain! Think about all of the things that you buy throughout your week without really paying attention – snacks at work, a magazine when you stop for gas, that cup of coffee on your way in every morning. And don’t forget about the expenses you are racking up because of financial disorganization – interest charges on your credit card debt, late fees because you forgot to return that movie on time, overdraft charges because you didn’t balance your checkbook. All of these fall into the category of unconscious spending. You just do it because it’s a habit. And although you think that a dollar here or fifty cents there is insignificant, it can really add up.

So for a month, record every penny that leaves your hand, in the form of a check or cash or a credit card transaction. This may sound like a huge challenge, but you can do it! Make it convenient – my husband stuck a small pencil and piece of paper in his wallet so he would be reminded to make a note every time he made a purchase. You will be stunned when you see where your money is really going! My husband was shocked to find out that he was spending almost a hundred dollars a month on that morning coffee (am I picking on Starbucks too much?!) What’s your vice – eating out when you are feeling lazy? Buying every new CD or magazine that comes out? I’m not suggesting that you completely eliminate these habits – just that you decide how often you can reasonably afford to indulge and still reach your other financial goals.

It’s also important that you have some idea of your liabilities – debts that still have to be repaid. Did you figure these payments in with your monthly expenses? If you are only counting the minimum monthly payment, you will never pay your debts off. You may not be able to do it right now – but after we get your budget in order, the goal is to pay at least double the minimum amount on at least one of your liabilities each month. You should start with the credit card or loan that has the highest interest rate – then tackle the next highest after the first debt is paid off. And if you can afford to pay more than double, go for it. You aren’t really free to start working on other financial goals until you know you are debt free.

Do you really know how much you make? The tendency is to quote whatever is printed on your employment contract – to say, "I make _____ a year." But after taxes and Social Security and any other items that are deducted from your check, what are you actually bringing home? Take a minute to really examine all of your sources of income and calculate an honest total – you can’t have a realistic budget without it!

So, comparing income to expenses, how does it look? If you came out in the black, congratulations! How much do you have left over? Regardless of how small or large the amount is, start stashing it away into savings and investments! Your choice of how to proceed will depend on your financial goals – investing for retirement will involve less liquidity and more risk than just saving for next year’s vacation. The main thing to remember is that you should build your savings and investments into your budget just like a bill – and take care of these long-term responsibilities FIRST, before other costs. That’s the secret to good financial management.

Now, if you ended up in the red, we need to talk. The first step is to look at spending which can be reduced or even eliminated. Start by examining those "spending leaks" – if they give you pleasure and satisfaction, dandy. Certainly late fees and interest charges don’t fall into this category! But you can still overdo a good thing. Ask yourself if eating out 4 times a week gives you 4 times more pleasure than doing it just once. And could you get as much pleasure if you cooked a good homemade meal? Is the ridiculous mortgage on that 10,000 square foot house worth it? Or could you be just as happy (or even happier with less financial stress) in a place half the size? Also look for convenience expenses – things that we spend money on because we are overwhelmed, too busy, or just worn out. Perhaps by re-evaluating how you use your time, you might discover that many of these expenses are just symptoms of misplaced priorities. When you arrive at a place where all of your spending decisions are DELIBERATE ones, you will find yourself several steps and quite a few dollars closer to a balanced budget that allows you to reach all of your financial goals.

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