Balancing act - creating and sticking to your personal budget
Dollars & Sense
For the past few years, youve scrimped, youve saved, youve eaten at home instead of going out. After all, desperate economic times call for desperate measures. But now, the economy is showing signs of life and youre ready to throw off the chains of frugal living.
Do you know if your budget can take it?
The economic crisis made all of us sit back and take stock of the wants versus the needs in our lives. Its okay to indulge a little now and again, but the economic crisis serves as an important reminder to live within our means. Making and sticking to a budget, even as the economy is improving, makes good fiscal sense.
Im no good at math
So you cant calculate when two trains will collide after leaving their respective stations on the same track at the same time. Never fear. Your personal budget can be simple and there are many basic budget programs available for free online. But even if youre armed only with a pencil and a piece of paper, you can put together a perfectly good budget (you dont even need a calculator you can count on your fingers when no one is looking).
Top budget tips
Determine what you earn. How much money do you have available to spend? Using your pay stubs, calculate what you make each month after taxes.
Determine your expenses. Mortgage or rent, car payment, insurance, medical expenses, etc. Write it all down in a list.
Track casual spending. This category encompasses the $10 you just shelled out for lunch, the candy bar you picked up at the gas station, or your favorite cup of gourmet coffee. Those are all expenses that you need to start tracking as part of your budget. Youll be surprised at how quickly a dollar here and a dollar there can add up.
Calculate. Just a small bit of math now. Subtract your expenses and casual spending from what you earn.
Freak out. If youre like a lot of people, you may be spending more than you earn. Now, take a deep breath and review your expenses and casual spending. What can you eliminate? Keep in mind, its easier to cut your spending than to increase your income.
Needs versus wants. Yes, you need shelter, food and clothing. But even within these major needs, wants can worm their way in. You need a home, but do you need a six bedroom home? You need shoes, but do you need a pair of Manolo Blahniks when a pair of Keds will do just fine? Its time to do some hard thinking about needs and wants.
Get your budget on track. Now that you can see where your finances are going off the rails, develop a plan to get back on course. Create a monthly spending plan that incorporates your income and expenses. Aim to spend only 90 percent of what you make, leaving 10 percent for savings toward your goals.
Create an emergency fund. You have a budget and youre sticking to it, right? Right. Now use the money youre saving to create an emergency fund. Experts recommend having six months worth of living expenses on hand for unforeseen circumstances – car repairs, loss of job, health emergency. And once your emergency fund is in place, youll put your extra money toward your retirement savings, right?
Get the family involved. Everyone who is affected by the family budget should be a part of the budget-making process. What are your goals as a family? Saving for a vacation? Putting an addition on the house? Sit down and talk about what you want to accomplish and what it will take to save the money you need to reach your goal.
Review and monitor. Over time you may get a raise and investments may rebound, but dont get all crazy and forget about the big picture. Stay ahead of the inflation thats sure to follow and save more. Review your budget each month and continue to compare actual expenses to what you forecast in the budget.
Dollars & Sense is a regular column supplied by the Oregon Society of CPAs