Wow, first week live on Financially Digital and it was full of great of feed back! The questions and comments keep pouring in and I have to say that I am having a lot of fun getting back to people. As we are touching on some foundation building topics; I would like to take today to cover budgeting. This is another one of those topics that reminds me of flossing your teeth. You know that keeping your teeth healthy means that you should be flossing after every meal but you, or at least I personally, don’t do it as often as you should. It’s not that you don’t care about your teeth, or financial situation for the sake of the metaphor, it’s just that there is always something getting in the way. I’m guilty of it too. So, today I am going to introduce some simple concepts and a great free website that will keep you organized. If you're not convinced on living large on a tiny budget check out this book I recently finished with called 10,001 Ways to Live Large on a Small Budget. I honestly thought it was full of tips and tactics to keep you living the lifestyle you wanted and not a bad price either as I too am I on a budget.
The first step to a simple budget is to outline all the places you derive an income from on a monthly basis. If you have a nine-to-five that pays twice a month and get paid cash for bouncing on the weekends, all of it counts. The point of this is to get a baseline of cash inflows to net against expenses. Next take a look at your bank statements, credit cards, and check books to get a handle on where you money goes during that month. Quick rule of thumb, it’s never a good thing if you notice your cash outflows are greater than your inflows on a regular basis. While you’re looking at your cash out flows try to divide them into two buckets, variable and fixed. Examples of fixed are: your cable bills, day care expense, monthly rents or mortgages, cell phone bills, and things you know you’re on the hook for every month. Variable expenses would invariably be labeled everything else. Last but not least and probably the most important are your goals. Grab three buckets this time for short, medium, and long term goals and jot down all the things you’re saving for or would like to do with your money. My guides are if it’s under a year it’s short term, one to three years is medium and over four is long term.
Now you have amassed a great deal of information and it’s time to sort it out. Start by netting out your monthly expenses using your fixed expenses against your monthly take home pay first. Then move on to variable and take a look at what you have left for your goals. If you are not happy with what you see then it’s time to make some changes. Start with your variable expense, are there things in there that you might be able to do without. Better still are you consistently spending more than you thought you were? Aside from packing a lunch and skipping the four dollar lattés there is some real practical advice I can give you. Divide up your goals and automate. What I mean by that is take the goals you put in those three buckets and set up separate bank accounts for each of them. If you have a main bank account that you use to do most of your banking, set up automatic monthly transfers to each of the accounts labeled for that goal. Start off small and work your way up but, always up never decrease otherwise all this organizing goes to waste. With accounts labeled for travel, a new television, or just a monthly entertainment expenses you’re more likely to actually hit those goals. The more clustered the assets are the easier it is for you to “dip” into them or worse get discouraged and blow up whatever plan you just put on paper.
Allow me to introduce www.mint.com. It has been praised in multiple financial magazines and websites as well as winning a 2009 Webby Award or two. For everyone that thought doing what I just outlined was a lot of work, this website should give you a big incentive to start planning. It will go through the basic budget creation and monitoring all the way to delivering colorful analytics and checking your brokerage account balances. It gives you a sense of ownership in your planning that makes it easy to stay faithful to and its fun to use. The only reason I can say such good things about it is a financial professional is because I use it as well and see it as such a great resource. So moral of the budgeting story is think about what you have going on right now, check out the website and start automating. When you use a site like www.mint.com you can get some real depth to your spending and saving habits and realistically work towards your goals a lot sooner than you may have thought possible.
If you are stubborn and are the kind of person that carries around a notebook and writes down everything in excrutiating detail in place of the web-based option I suggest something like Home Budget Book, 64 Pages, 10 1/2"x7 1/2", Teal (DOM840) Category: Tax and Accounting Forms. It's simple, straightforward, inexpensive, and spiral bound. Everything that college ruled notebook you've been using every week isn't. Happy budgeting!