Preparing Your Personal Budget

Michael Lodge –

For the remainder of 2017 I have decided to really focus with you on how to get out of debt and create your monthly budget to stay in control of your money.  Don’t let your money control you – you have to learn how to control your money.  In every relationship the biggest fights are over money, and it is usually about why isn’t there enough money.  No one is preparing for emergencies in advance.  In today’s blog we are going to talk about budgets, your own household budget.  If you are married do not do this alone – both of you sit down and work on this together – every single month.

There are many free budgets tools that you can use out there, one of them is from the Federal Trade Commission:  MAKE A BUDGET

Dave Ramsey and his group, who continually teach people on how to create budgets, has a free budgeting system online:  EVERYDOLLAR

Every month you need to do two things 1) sit down and create a monthly budget, looking at your online bank account is not budgeting – and 2) start putting money into emergency fund to cover emergencies.  Start with $1,000 and build on it.  Remember this fund is not for spending – it is for Emergencies only.

1. Follow the money: Track your spending

The first step to developing a budget is to track your expenses, using a smart phone app computer program, or old-fashioned pen and paper. Be sure to record every purchase, no matter how small.  Use one of the budgeting tools I have listed above.

Once you know where your money is going, you can make an educated decision about how best to allocate your money.

Many beginner budgeters make the mistake of becoming too financially conservative, at least on paper.  “The No. 1 rule of setting budgets is to not cut all the fun out of your life, however do it in moderation. Inevitably, Spartan budgets that have no allowance for entertainment are doomed to fail.”  Instead, learn to moderate. If you’re eating out every night, and that’s something you enjoy doing, try eating out once a week instead.  It’s not about cutting out everything that gives you joy in life. It’s about better allocating your money.

2. Make savings contributions automatically

Though every budget scenario is different, Curt Weil, a CFP professional and president of the FPA of California, says a good rule of thumb is to allocate at least 10% of your earnings toward savings, using direct deposit to pay yourself first.

If you put that money aside before you even see it, you won’t miss it. Direct deposit helps to put your savings on autopilot.

Short-term savings that you may need to access can be held in an interest-bearing savings account, 6-month certificate of deposit or money market fund. Long-term savings, meanwhile, should be directed toward a tax-friendly retirement savings tool, such as an IRA or 401(k).

The ultimate goal is to save and use the tax code to help you take the correct deductions on your tax return if they apply to you.  Sit down with your tax accountant and tell him what you want to do.

3. Define spending and priorities

Another 35% of your earnings, he says, should be earmarked for housing and utilities. Weil says, however, that homeowners can often increase that percentage since principal payments are already a form of forced savings, and the mortgage interest they pay is tax-deductible.

If you’re saving for something specific, such as a new car or your child’s college education, you may want to set aside another 10% of your earnings into an interest-bearing account or a tax-favored 529 college savings plan.  However, if you can’t afford a new car do not go into debt.  Remember we are trying to reduce debt of all kinds.

Everything else — the remaining 45% — is discretionary, for use on food, entertainment, clothing and vacations.

That’s where priorities come in. You can’t have everything you want, says Martin Siesta, a CFP professional and founder of Compass Wealth Management in Maplewood, New Jersey, but you can direct your dollars toward things you want the most.

If you as a consumer start by deciding what’s most important to them, then cutting back on some of the things that aren’t that important isn’t really a sacrifice.

4. Pay with cash

Once you’ve determined how much to set aside for saving, spending and investing, it’s time to make those numbers stick. Using credit cards and debit cards makes it all too easy to overspend.

With the exception of your mortgage and car loan, most consumers should implement a strict policy of paying with cash for groceries, clothes, vacations and nonessential items.

Rely less on ATMs, especially those that charge a fee. Withdrawing a fixed amount of discretionary money at the beginning of the month forces you to make better spending choices.

 “By spending cash out of an envelope, you begin to get a better feeling for where your money is going and what your priorities really are.”  The more you feel money leaving your hand the more you feel it.

5. Strategically pay down expensive debt

You’ll never get ahead if you don’t also implement a plan to pay down your debt. Interest payments made to credit cards not only cost you big, they also deny you the ability to apply that money toward savings or entertainment.  Debt grows quickly, paying it off is harder if you do not have a plan to pay debt off.  That is why you create a monthly budget – stick to it and pay down all debt as quickly as possible.

Not having to pay interest is the same, economically, as earning interest. So not having to pay credit card interest is like earning 18%.

Consumers with multiple credit card balances should tackle the card with the highest interest rate first, while continuing to make minimum payments on their other cards. Once the first card is paid off, focus on the next-highest-rate card.  When you pay off a card – cut up the card.

However, that some debt-laden consumers get a psychological boost by paying off the smaller balances first. “Paying off your highest-rate card first makes sense because it saves you the most money, but if you have several smaller cards, it can be easier psychologically to get those out of the way first.

The secret to paying off debt is to determine how much you can afford to send each month and make those payments consistently.

“It’s important to keep sending the maximum amount you can afford to send. “Some people make the mistake of reducing the amount they send when they see their payments going down.”

6. Build a safety net

No matter what your debt situation, you should also begin saving for a rainy day.  We call this the emergency fund.  Only used for emergencies.  The highest debt that individuals have at the moment is medical expense debt, their deductibles are so high that medical debt grows.  You have to have an emergency fund to pay off any emergency that arises, care repairs or whatever may come up.  Start by building a $1,000 fund in a seperate account and add more money into it each month.

Financial planners recommend setting aside 3 to 6 months’ worth of living expenses for an emergency fund in case of job loss, illness or an unexpected bill.

It’s important to set aside savings while you’re paying off debt. It may sound backward, but if you don’t have an emergency account and you pay down your credit cards for 6 months and then an emergency pops up, all the progress you have made is going to be instantly wiped out.

The most painless way to save, of course, is to set aside any financial windfalls you receive, such as bonuses, tax refunds or yearly raises. You could also try saving your change or any $1 bills that find their way into your wallet.

7. Live within your means

Learning to live within your means is a simple matter of spending less than you make. For most consumers, that means cutting back. It does not mean doing without.

There are dozens of ways to reduce your monthly expenses without crimping your lifestyle.

And above all else, stop trying to keep up with the Joneses. Your neighbors with the latest clothes and luxury cars may be drowning in debt, and while you may not sport a designer watch, you will be able to sleep at night.

Being in control of your finances not only saves you money, but it also makes you a more financially secure person and family.
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