In our January issue, black enterprise began one of its most ambitious projects to help you get your finances in shape: the Black Wealth Initiative. We introduced the Declaration of Financial Empowerment, which we affectionately call DOFE, comprising be’s 10 commandments for building wealth.
In previous months, we’ve delved into DOFE principles one through four: save and invest 10% to 15% of your after-tax income; be a proactive and informed investor; be a disciplined and knowledgeable consumer; and measure your personal wealth by net worth, not income.
This month, we introduce DOFE principle No. 5: to engage in sound budget, credit and tax management practices. And this rule can be thought of as the foundation for all the other DOFE principles.
Financial planners, investment advisors and tax specialists say establishing a sound strategy that accounts for your everyday spending, credit and tax management practices is a cornerstone for building wealth and should keep you from sabotaging your investments.
Often, people will visit a planner or accountant looking for advice and say they have no money at all to invest. But a careful examination of where your money is really going-from that weekly excursion to the record shop to buy $100 worth of the latest CDs to that tax deduction you aren’t taking-can be an eye-opening first step toward establishing a realistic spending plan.
Put it on paper. The first step to creating a budget is simple: put down on paper what you’re spending your money on. That sounds easy, but it takes discipline and honesty-in other words, don’t omit anything, no matter how small. To get started, use our sample Consumer Budget Planner form in this article to balance your books. Track your spending for at least 30 days to six months to get a true handle on where your hard-earned dollars are going.
If you prefer using your computer, there are several software programs tailored for personal budgeting use, like Intuit’s Quicken or Microsoft Money.
“When we see new clients, we’re very adamant about this. Do it in pencil and paper,” says Dennis Kroener, a CPA and personal financial specialist with Pitt, Ryan & Linnear in Chicago. “Most people don’t do that pencil-and-paper exercise and they guess what they’re spending their money on.”
Kroener says when clients see all their expenditures, they can figure out just how much discretionary income they really have. And some expenses fall into the “Do I really need this?” category, he says, like that $3 cup of gourmet coffee you buy every morning.
- Cut unnecessary expenses. “Once you see [what you're spending] in black and white, you can figure out what you can cut. I call it going on a money diet,” says Gail Perry-Mason, first vice president of investments with First of Michigan, a division of Fahnestock, a brokerage firm in Detroit.
- Eliminating wasteful spending, impulse buying and finding cheaper alternatives is crucial, Perry-Mason says. Are you spending more than $100 every week at your dry cleaners? Find one that gives you a discount for regular service. Are you taking videos back