Your Budget and the Power of Fives

Do you feel like you are always out of money? If so, you are a lot like nearly everybody else. Interestingly there is one thing you can do that will practically guarantee you more spending money: Make a simple budget and stick to it. I will share with you some simple steps in a moment, but first let me assure you that this is the best time of the year to talk to you about budgeting. There are several reasons for that.

For starters, most of us are feeling more financial pressure right now because of the holidays. The bills are headed your way and you may not be able to pay everything in-full and on-time. Just as damning, the IRS is counting the days until April 15th, and waiting for us to help pay the country’s bills. And you are probably thinking about the warmer days of summer on the horizon and considering upgrading a car or some home improvements or a vacation. Throw in a few uncertainties about the economy in general and most of us are a bit weary of our financial woes. A simple, but solid budget can go a long way toward improving your lifestyle.

Here are some good steps to take for budgeters of all sizes

1) Do some homework – You are undoubtedly going to scan your checkbook and credit card statements for tax deductions very soon, so take this opportunity to double your purpose. Look at each and every expenditure of the past year and list them all in some basic categories: A dozen of the more common ones would be: Tithing, Saving, Home mortgage and maintenance, Utilities, Fixed payments such as auto loan, Auto gas and maintenance, Insurance, Vacation, Groceries, Medical, Entertainment, and Miscellaneous. If you find this last category to include quite a few things, you can break it down further. Additional categories might be cable TV packages, the kid’s allowance, lawn care and the like.
2) Don’t Forget The Cash - Do you pull out some spending money when you deposit your check? Do you drop by the ATM to get some operating capital? Tmason does. When you write a check at the grocery store, do you write it for a little over the purchase amount and pocket the difference? Do you cash the smaller checks that you get from time to time rather than depositing them into your account? No budget would be accurate without identifying these items. In fact there is a good chance that these dollars are just floating off into the cosmos somewhere. We will fix that in a moment. For now, swallow hard and write down you best guess of how much this category equals in a year.
3) Income - How much income do you earn each year? Consider all of the income from reliable sources.
4) Reconcile - Okay, it is the moment of truth. Do the math. Are your expenses more than your income or is it the other way around?
5) The Outcome - If you have more income than you spend, then you live within your means, and you deserve a pat on the back. That is good, but it may not be good enough. I know people in this group who waste incredible amounts of money. Those people can also benefit from prudent budgeting, then they can save and invest the residuals. The rest of us are unable to pay off credit card bills each month. That lifestyle carries with it a very heavy financial burden. The interest consumers pay for those cards (and any other debt such as car loans) is money they could be spending or saving and investing. Either one will enhance their life styles.

Once you have an accurate handle on your situation, it is time to find out where you can make improvements that will improve your lifestyle – in the long run. Here are 5 things “To do”.

1) Make a plan – Write down how much money you really NEED for your bills. Then add the items that you don’t particularly need, but are fairly important to you. i.e. one dinner out every 10 days, an upgraded cell phone package, a boat, etc. x Allow for some, but not all, of the things you would like. You should have a spending allowance and some money for an emergency fund. By allowing yourself certain regular but structured indulgences, they become something to look forward to rather than one fleeting impulse after the other, which collectively carry costly long-term consequences.
2) Keep score – You cannot be sure how you are doing unless you keep score. It is important to know what you are trying to do and what you are trying not to do. It is not overly difficult. Once every month after you pay your bills, repeat the exercise we did earlier: Write down all of your income and expenses then compare to see how you are doing. If adjustments are needed, it is a lot easier to do it sooner rather than later.
3) Start trimming some fat – when you have a good overview of your finances, it is fairly common for some glaring problems to hit you in the face. For example, one fellow I know was shocked to find out how much he spent in bars. He immediately cut back on buying so many drinks for his friends. You might find that you go to dinner quite a bit, or you buy tools that you don’t need or you spend $2,000 per year on fancy TV cable packages. All of these offer changes you can make to hang on to more of your money.
4) Cut down on impulsive cash purchases – By using your check book or credit cards for all of your purchases, you will not have missing money. If you have an absolute need for carrying around cash, get some envelopes and put a weekly allowance in them. Once the envelopes are empty, do not run over to the ATM or anywhere else to resolve your liquidity problem. It is okay to take a small amount from you “emergency” envelope, but do not sneak out and get new cash. At first you may be tempted to subsidize your impulsive purchases with your checkbook or credit card, but this will be obvious the next month when you review your budget so you will have an opportunity to notice and modify your behavior; but, if you just keep throwing cash in the wind it is nearly impossible to get an idea just how serious the problem is, let alone fix it. You are at a critical crossroad. Take the correct path now and you will have enormous rewards later, when you are out of debt.
5) Swallow your pride – If it is necessary to sell your boat or buy a smaller home, then go do it without concern for what others might think. If you don’t make smart adjustments on your own, you may never get out of debt or might even end up losing it all. By implementing good judgment now, you will be able to raise your lifestyle even more at a later time.

Your “Do not” list also has 5 good tips.

1) Do not panic - There is a way out, no matter how bad your situation is, so pproach the entire ordeal with logic, not emotion. It does no good to get overly upset about it. That negative energy is not good for your health or the other people around you. Besides, there are millions of people, including four past presidents, who have filed for bankruptcy or lost a home in foreclosure. Furthermore, there are laws in place to assist people to get back on their feet so forgive yourself from the past and start making smarter choices that will lead to a more productive life.
2) Do not make impulsive purchases – Some people derive importance from buying things on the spot. It is as if to say, “I am successful and I can buy anything I want.” Well, who cares? This may be one of the habits that got you in trouble in the first place. It is okay to spend money here and there, provided it comes from a defined account for that purpose, but buying an endless chain of unnecessary goodies is stupid, not a sign of success.
3) Do not take on more debt – If you cannot pay off all of your credit cards and other bills in-full and on-time every month, you are living beyond your means. One of the worst things you can do is compound your problem by pulling out your credit card or buying a new car. Resist the temptation to take on a new credit card so that you can transfer balances to a lower rate. That new line of credit may just serve as an additional source of temptation to buy even more stuff. Furthermore, new accounts lower your credit scores and can lead to all sorts of problems including getting your insurance rates raised.
4) Do not refinance your home – Financially challenged people tend to see the equity in their homes as a source of funds to pay off other bills. That is foolish and very dangerous. Subsidizing frivolous spending habits in this way merely serves to enable you to live beyond your means and drive yourself further into debt. If you find yourself saddled with so much debt that you cannot reasonably expect to pay it off within 30 months, then you may be forced into refinancing but this should only be employed after you have abided by the budgeting practices we have already discussed. Once you have established good habits you are less likely to see all of those paid off credit cards as an invitation to revisit the same old bad habits. If you intend to stay in your home for a few years it is okay to refinance, provide you reduce your interest rate by one percent or more. But do not be tempted to pull cash out unless it is to be used for safe investments which bring in more income than the interest expense on the new debt.
5) Do not spend all of the windfalls- When you get one of your credit cards paid off of a car paid off, do not run out and spend that money. The same thing when you get a raise. Do not spend it all. I suggest you use half of it to increase your standard of living slightly and the other half to pay down other debts even faster.

If you are not able to pay off your credit cards on-time and in-full every month then you are living beyond your means and spending money on interest which could be going to enhancing your lifestyle. Your goal should be to get into that situation within a reasonable period of time, say 2 to 3 years. If you are living within your means, as defined, then your goal should be to accumulate funds, which you can invest for passive income. By accumulating additional income, you are destined to enjoy all sorts of new benefits and that is the purpose of this entire conversation.

One of my favorite budgeting tools is available through Mvelopes. It is an on-line version of the traditonal envelope sysptem of budgeting.

Another popular monetary tool is an on-line checking account. One of the well know spots is held by ING Direct.

Finally, you can get many other budgeting tools from Dave Ramsey. His site is here.

Your thoughts are invited

Don't forget my other blog about human interest topics