Wednesday, June 27

The B Word

Many of us think of the 'B' word (Budget, what were you thinking?) much the same way that we do about dieting. We know that it would be good for us, but it's a pain to get started. Then, when we finally do get started, we don't stick with it very long.

A good diet will help you stay healthy. A good budget will help you stay financially healthy. In order to succeed, you need a success plan. This is what a budget can be for you; a financial success plan.

So, you think you're ready for a financial diet? If so, here's what you need to do to get started.

First you need to figure out how much money is coming in the door every month by adding up all of your take home pay. This is your income after taxes and any other deductions that are taken out of your paycheck by your employer. This amount is also known as your 'net pay'.

If you are paid weekly, multiply your take home pay by 52 and then divide by 12 to get your monthly income amount. If you're paid every other week, then multiply your take home pay by 26 and divide by 12.

Do not include any bonuses, gifts, occasional overtime, or any other infrequent source of income. Right now, you're interested in what regularly comes in the door every month.

Next, you need to determine your regular monthly expenses. For those expenses that you might pay only once or twice a year, break them down into monthly installments. For example, you might pay $400 twice a year for your car insurance. Take $800 and divide it by 12. Use $66 as your monthly car insurance expense.

For your housing expense, be sure to include your entire mortgage payment (principal, interest, tax and insurance).

Set aside an additional amount for your home maintenance allowance (assuming of course that you're not renting). This amount should equal about 1% of the purchase price of your home. If you paid $100,000 for your home, then you might consider setting aside $1000 per year, or $84.00 per month for this expense item.

You should also think about establishing an emergency fund. Advisers recommend saving 5% of your take home pay. So if you take home $3000 per month, you may want to set aside $150 per month in your emergency fund. Remember, don't touch your emergency fund unless it really is an emergency!

Now, compare your results. If your expenses are more than your take home pay, there's a problem. It's best to address this problem immediately and head on now; it's probably not going to go away on its own. What can you do about it?

Look where you can cut back Some of your expenses are fixed meaning that the amount doesn't change every week or month. Other expenses are discretionary, meaning that you are in control of how much is spent in these areas. Look hard at your discretionary spending first.

Then, invest some time thinking about your wants and needs. The discretionary items that you simply cannot go without are your needs. What's left are your wants. For example; do you need the 1000 channel cable package, or is this something that you just want because its nice to have? This wants list is where you'll start looking to make cuts in your discretionary spending.

There are many budgeting software packages available on the market. In a coming post, I'll name a few that you might be interested in looking at.

In summary, you need to first get a handle on where you are before you can decide on how to get where you want to go. These steps will help you identify your cash flow situation and where you are today financially.

Be sure to visit Blogging Away Debt who is hosting the first Carnival of Personal Finance in July for more posts like these!