There is no way to avoid the B-Word. We believe that you must have it if you want to hang onto your money. Sam is a successful businessperson who has owned his own businesses for the past 50 years. He could not have done it without the B-Word.
The B-Word is a budget. People are afraid to say the word aloud, as if it was contagious! However, a budget helps you control your spending so it does not control you. If you have never created a budget before, think of it as a simple chart that tells you what money you have coming in and going out. A budget is a guideline to help you understand how much you can afford to spend on which categories of expenses.
Here are some tips on how to make a simple budget for yourself and stick with it.
A great plan with no action is simply a great plan
A budget is a plan that will not work unless you act on it. Once your budget is in place, you can adjust it as needed. Only you know what you really need to include in your budget and what you can eliminate. If your budget is accurate for you specifically, you will be able to discipline your spending.
“Most people don’t plan to fail, they just fail to plan.” Without a plan, it is easier for your money will disappear and you will not know where it went. Make a plan to keep track of where your money goes throughout the day, the week, the year, and your entire life.
Use a budget guide
To set up your budget, you can use the 27-page budget guide on familycredit.org. It has worksheets to list creditors, calculate your net worth, your income and expenses, your monthly budget, and your bi-weekly budget.
At teachmeaboutcredit.org (800-994-3328), you will find a personal budget guide, as well as newsletters that will send you monthly budgeting tips. The Personal Credit Guide points out how you can save thousands of dollars simply by eliminating things like sodas, donuts, morning cappuccino, video rentals, and cigarettes. If you are in the habit of buying your lunch on workdays, you may be paying at least $6.00 per day. If you make your lunch at home and bring it to work, you would save $1,500 per year. Not only that, two other things could happen: you could finish your work earlier and you could lose weight!
Everyone has more expenses than he or she thinks think they do. When you design your budget, be honest with yourself. First, add up all of your fixed monthly expenses. Then add in fixed annual expenses including the premiums on all of your insurance policies and property taxes. Make a rough estimate (on the high side) for income taxes, annual physicals, dental cleanings, and routine car maintenance. Establish how much you want to spend each year on gifts, travel, and home improvement. Do not forget that everyone has unplanned expenses for car repairs, home repairs, dental work, and doctor’s visits.
Use different kinds of money
To master your finances with a budget you need to know about three kinds of money: fixed expenses, flexible expenses and discretionary expenses.
Fixed expenses never change month to month, such as rent or mortgage payments, loan payments, car payments, insurance payments, etc.
Flexible expenses are for necessary items that change in amount month to month, such as groceries, utilities, credit cards charges, household items, clothes, haircuts, etc.
Discretionary expenses are things without which you can survive. This is what is left over after your fixed and flexible expenses have been allocated. It includes the things you do for entertainment, such as dining in restaurants, going to the movie theater or plays, joining clubs and buying books, music and hobby items. It is your daily cappuccino and newspaper. Discretionary items are purchased with what is called disposable income.
Know your disposable income
When you cash your paycheck, set aside your savings first. This is called “paying yourself first.” Then set aside the money you need to pay your bills and provide for your monthly needs such as food, lodging, health insurance, transportation (bus fare or auto maintenance and insurance).
What is left over is your “disposable income.” Save most of this in a special account or envelope for upcoming events, such as travel, entertainment or holidays. You also need a certain amount of “walking around” fun money to use as you wish during the week. Even if your fun money budget is only a few dollars, you can enjoy spending it without guilt.
Make a budget that works
To make a budget that works, first figure out what you spend for the three kinds of expenses listed above. Second, plan to take out the fixed expenses from your income each month as quickly as possible. You could have online billing that takes it directly from your paycheck. Third, determine a specific amount that you can spend on all the flexible expenses, such as groceries and clothes. Put that amount in cash in a separate envelope for each category. Fourth, at the end of each month, decide what you will be able to spend the next month on discretionary items. Put the cash into a special discretionary envelope and use it for your entertainment desires.
Remember, if your budget is not workable or if you deprive yourself too much, you will be tempted to toss the budget in the trash. Make your budget realistic and gradual. If you are patient with yourself, you will stick with it and see the results.
Heidi Clingen is a long-time resident of Stevenson Ranch. She and Samuel K. Freshman are authors of The Smartest Way™ to Save, Why You Can’t Hang on to Money and What to Do About It. They offer only their opinion, which does not constitute professional, financial, or legal advice. To receive a copy of The Principles of Financial Independence or submit questions, email them atHeidi@TheSmartestWay.com