A lot of money passes through your hands each month. If you earn and spend $2,000 a month, that amounts to more than a million dollars during your lifetime!
Wouldn’t you like to set some of that money aside for long-term goals rather than letting it sift through your fingers? By cutting back on some expenses, you may actually be able to live better and indulge in luxuries you didn’t think you could afford.
To cut back, you have to know what you have in the first place. Then tailor your expenses to fit within your income, including money to save. The best way to do that is with a budget. For many people, the term “budget” is synonymous with “deprivation.” Budgeting is like a financial diet, and nobody likes to diet, financially or otherwise. But like a sound nutritional plan, budgeting is beneficial, and it doesn’t have to be distasteful. With a budget, you can get more enjoyment from the money you spend, planning your finances rather than spending recklessly. You’ll be happier, and your money will go farther.
Where Do You Stand Right Now?
Before you can plan for your future, focus first on your current finances. Use these seven simple steps to compute your present net worth, which is simply the total value of what you own minus what you owe.
If your debts are greater than your assets, you will come up with a negative number. That means you have been living far beyond your means, and it is time for serious action to prevent further jeopardizing your financial future. A positive number doesn’t mean you are off the hook, however. Is your net worth high enough? Even if your net worth is higher than you expected, you may still feel uncertain about your finances. For example, if your liquid assets in Step 1 are less than your debts in Step 6, excluding home and car loans, you may feel awash in debt and out of control financially (see sidebar). If your retirement assets in Step 4 are minimal and you are fast approaching retirement age, you may worry about your future retirement well-being. If the personal use assets in Step 2 constitute the bulk of your net worth, you may realize that funding your future needs could require selling some of these assets and scaling down your lifestyle.
- STEP 1: Cash. Add the amounts in bank accounts, certificates of deposit, money funds, and cash in your wallet.
- STEP 2: Personal use assets. Total the value of your home, personal furnishings, jewelry, automobiles, vacation cabins, time-shares, and the like.
- STEP 3: Insurance values. Look up the current value of all cash-value insurance policies.
- STEP 4:Retirement plans. Add your IRAs, 401(k)s, SEPs, pension and profit-sharing plans, and other employer-sponsored plans. Include only the portion you would receive if you left your employment, which is called your vested share.
- STEP 5: Other investments. Stocks and bonds, mutual funds, investment real estate, limited partnerships, annuities, and the like, plus amounts owed to you by others and the value of your business go here.
- STEP 6: Debts. List your debts, including mortgage, bank loans, and credit card debt.
- STEP 7: Net worth. Add the assets, subtract your debts, and you have your net worth.
The Way to Save
Now that you know how to track and control your spending, it’s time to start setting aside extra for the future. Of course, when we’ve told [people] this, many have said, “But I can barely live on what I make now!”
One of the easiest ways to save is to trim your paycheck. Have your employer automatically deposit a portion of your paycheck directly into a separate account without the funds ever passing through your hands. Money that is deducted from your paycheck and deposited into a credit union account, savings or stock purchase plan, or government savings bond is money you are saving for the future.
When you work overtime, don’t spend the extra income frivolously. It represents your leisure time, so save it for something you enjoy, or add it to your retirement account.
It’s a Family Affair
The spending plan you create will be a unique reflection of you and your habits, needs, and desires. If you’re creating a budget that affects other members of your household, you’ll need to win their allegiance before you set down the guidelines. Try not to impose too many stringent spending controls on family members at one time, or you may have a mass mutiny on your hands! To keep the peace, each member of your family should have some money that he or she can spend without being accountable to the budget. To allow for this, add an expense category to your spending plan called “individual allowances.”
Budgeting 101
A budget can help you get a handle on your finances. After all, if you don’t know where your money goes, you’ll live and spend from day to day with no clear idea of how much money is moving in and out of your accounts.
Devising a budget may seem a daunting task, but it really isn’t that difficult. To help you figure it all out, follow these four simple steps:
1: Create a worksheet so you can analyze where your money goes. Add budget categories that are uniquely yours: for example, if you are enrolled in school part time, you may have additional expenses for tuition payments, textbooks, and supplies.
2: Figure out where your money has gone. Go through your checkbook and credit card statements for the past year and list each check or itemized credit card charge in its proper category. Add the amounts in each category, and you will have a summary of your spending by category for the past year.
3: Create your budget for the coming year. Decide where you can cut back, and how much, and subtract the changes from the category totals. Divide the revised amounts by 12 to arrive at your preliminary monthly budget. Compare the total of all expenses with your monthly income, and adjust the expenses as necessary until your monthly budget equals your monthly income. Be sure you allocate as much as possible to the category “savings and investments;” 10% to 15% of your gross income is ideal. Getting the inflow and outgo to agree may take some doing, but persevere until your budget balances.
4: At the end of each month, see how close you came to your budgeted amounts. Once you figure out whether your spending was over or under your budget, jot an explanation into the column next to major variances. If you consistently exceed your budget, you will have to adjust your spending habits or find a way to increase your income so that you can accommodate your extra spending.
Using a computerized program such as Quicken or Microsoft Money will make tracking your expenses much easier, because it does the math for you as you go along. A budget won’t give you more money each month, but sticking to it will leave you with more at the end of each month. You and your partner should both be clear about the budget for your household. Setting guidelines together can go a long way toward helping you avoid conflicts and achieve your financial goals.
Keep Track of Your Cash
If you’re careful about expenditures you pay for by check but undisciplined when it comes to spending cash, keep close track of your cash expenses. Each time you take out your wallet at a cash register, before you put your wallet
10 Clever Tips For Savvy Savers
Saving money takes some ingenuity and bargain-hunting acumen. But don’t confuse bargain hunting with saving money. If you buy something on sale you didn’t need or budget for, no matter how good the deal, you’ve just spent money you didn’t have.
The following strategies can help you trim costs across several categories, and keep your savings plan on track:
1: Clipping coupons. Coupons are great for saving money, especially for groceries and other items you buy regularly. Check your local paper and the weekly circular at your supermarket for the best deals, and if your store offers a discount club card, be sure to sign up. If you save even $5 a week, that’s $260 a year — which is money that can be invested toward long-term goals.
2: Stretching your clothing dollars. It’s easy to look like a million bucks without spending a fortune. Outlet malls and chain stores like Loeh-mann’s, T.J. Maxx, and Filene’s Basement offer designer clothing at a steep discount from retail rates. Update your outfits with accessories, rather than buying a whole new wardrobe each season.
3: Finding furniture bargains.If you need a house full of furniture, buy your furniture by phone or Internet from North Carolina, where the major furniture manufacturers are located. Even including the cost of shipping, you can save money. Or look for used furniture at flea markets and thrift stores and have the items refinished or upholstered to make them as good as new.
6: Enjoying inexpensive entertainment. These days, the cost of two movie tickets, popcorn, and soda can easily top $30, and if you go to dinner beforehand, you’re looking at a $100 date. If you’re looking for romance, try a home-cooked meal served by candlelight, followed by a long bubble bath or foot massage. You’ll cut your cost in half, and double your pleasure!
november 2004 : BLACK ENTERPRISE : blackenterprise.com
7: Doing it yourself. You can save the money and improve your expertise in the process by tackling projects yourself. Enlist the aid of a handy friend, surf the Internet for information, or buy a book on the topic if you need a little help. If you’re feeling adventuresome, you might also explore adult education classes and workshops to learn new skills and boost your self-confidence!
4: Conserving utility spending. Installing proper insulation and modernizing equipment like your water heater can help lower utility costs. To reduce your phone bill, shop different long-distance carriers for the best rate. You might also want to cut out special services, like call waiting, three-way calling, and caller ID, which can save you as much as $30 a month.
5: Curbing automotive costs. Taking precautionary measures can help you keep your car running smoothly and save on big-ticket expenses down the line. Be sure to change the oil when necessary, keep fluids at their full-level marks, check your tire pressure often, and bring your car in for regularly scheduled maintenance. These simple steps can help you get better mileage and will extend the life of your car.
8: Saving on the small stuff. Even small amounts saved regularly can grow into a sizable sum. For example, do you buy breakfast at the drive-through on your way to work everyday? The $2.50 you spend on a coffee and egg sandwich adds up to more than $625 a year. Invest that amount each year at a 6% rate of return, and in 25 years, you’ll have nearly $35,000. It’s true what they say: “The little things mean a lot.”
9: Locking in the best rates. Ideally, you should pay off your credit card balance in full each time you get your statement, but if you have to run a balance, make sure your interest rate is as low as it can be. If you transfer existing balances to a new card at a low introductory rate, read the fine print before you switch, so you don’t fall into a hidden trap.
10: Trading skills for services. Consider bartering your time and talent for services you might need. For example, you could offer to tutor the 17-year-old next door in French once a week in exchange for him mowing your lawn. Many communities offer full-fledged bartering programs administered through local agencies, schools, and hospitals, so do some research in your area to find out how to sign up.
Excerpted with permission of the publisher John Wiley & Sons Inc. from It’s More Than Money — It’s Your Life!: The New Money Club for Women. Copyright 2004 by Candace Bahr and Ginita Wall. This book is available at bookstores, online booksellers, and from the Wiley Website at www.wiley.com or 800-CALL-WILEY.