It has to be said, so lets treat it like a bandaid and get it over with quickly: budget. There, was that so bad?
A budget is a simple thing and nowhere near as scary as most people think. A budget does not have to be constraining to the point that you can't enjoy life. The opposite is true. With a budget you can achieve short and long-term financial goals like buying a house, taking a vacation, accumulating retirement savings, and just about anything else you can imagine. No, budgeting will not help you buy a remote island in the South Pacific, but budgeting can help you spend a couple of weeks there and have memories to last a lifetime without any debt when returning from your trip.
[AD]The one part of personal finance people like to hear about least is budgeting. However, without a budget how do you know if you are working towards your long-term financial goals? We hear about budgets all the time from politicians, but how many of you reading this have a budget, stick to it, and realize the benefits of knowing where you money goes every month?
Budgeting is simply working with your net income each pay period and figuring out how to divide it among your financial obligations, wants, and savings. There are two good ways to start creating a budget. The first way is to start by tracking your expenses for a month to see where your money goes. Use past credit union account and credit card statements to get an idea of where you spend your money. If most of your purchases are debit purchases that are difficult to identify on the statement, then start a log of your spending over the next month, especially when you use cash or a debit card. As for your credit card purchases, consider that as money outgoing for the current pay period. We will have a more detailed article about credit cards, but if you are carrying a balance from month to month, stop using your credit card immediately and include a reasonable amount in your budget aimed at paying off all high interest debt.
Once you have an idea of where your money is going, add up all purchases - cash, debit card, and credit card. Is the amount you spend less than your income for that pay period? Hopefully the answer is yes. If not, you are in the most need of a budget. Find areas where you can cut back, especially if you are not currently saving money. Are you spending too much on clothes or eating out? Start small and find little things to cut back on. You will be surprised how quickly the small amounts add up.
The second way to approach budgeting is to start from scratch. Look at your net income. Take 10% off your income and dedicate it to savings, either for retirement, a rainy day fund, or a long-term goal like buying a home. Next, subtract all your obligations, like rent/mortgage payment, auto payment, insurance, food, clothing....the basic necessities. Hopefully you still have money remaining. The amount you have leftover is money you apply towards entertainment and anything else non-essential. By starting with saving 10% and ending with entertainment, you can keep your priorities in order.
"But I can't live on 10% less," many will say as soon as they read that. It is a guarantee that there is someone out there who makes 10% less than you and has the same amount of financial obligations every month. Instead of trying to live like someone who makes 10% more than you, live like you make 10% less than you do. Without saving money from each pay check, you are unlikely to achieve long-term financial health. If a disaster does strick, you will have a savings set aside as well as a lifestyle that is easier to deal with a sudden negative impact on your income, like a job loss. Saving that 10% can mean the difference for many Americans in the long run between a financial setback and homelessness. Everyone should have a minimum of 3 to 6 months of their net income in a savings account available for emergencies, rather than relying on high interest credit cards to bail you out and set you further back.
Start budgeting today and review your savings account after one year and see the difference. If one year makes a small difference, what will you have saved in 5, 10, or 20 years?
Next week we are going to discuss some easy ways to cut back without making sacrifices that have you feel like you are living below the poverty line.