creating
a realistic budget
by Ramona Creel of OnlineOrganizing.com
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.
SET YOUR FINANCIAL GOALS
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!
CREATE THE SHEET
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.
TRACK YOUR EXPENSES
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.
ROOT OUT MONEY LEAKS
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.
DON’T FORGET YOUR DEBTS
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.
TALLY UP YOUR INCOME
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!
WHAT’S THE VERDICT?
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.
Ramona
Creel is the founder of OnlineOrganizing.com
-- offering "a world of organizing solutions!"
Visit OnlineOrganizing.com
for organizing products, free tips, a speakers bureau -- and even
get a referral for a Professional Organizer near you. And if you
are interested in becoming a Professional Organizer, we have all
the tools you need to succeed. (Copyright 2000, Ramona Creel)
