Stop Burning Cash!

Do you smell the odor of burning currency? If you ever find yourself wondering where your money went, then you need a budget. Without one, bills, debts, and morning lattes can quickly add up and send your cash up in smoke.

Documenting–on paper–how much money comes into your home, how much flows out, and how much you save is the first step toward tracking down those disappearing dollars.

Creating a budget can also help to uncover the source of financial problems. But according to the National Foundation for Credit Counseling, only 40% of American households use a budget. The rest take a hit-or-miss approach, never really knowing whether they’re living within their means, in need of a better-paying job, or in a position to rein in their debts.

The good news is budgeting isn’t difficult. One thing it does require is a deep look into your current financial picture and more than a bit of discipline. To show you how it’s done, black enterprise found three subjects in need of financial organization and paired them with advisers to help them draft workable budgets.

Chanel Graham worked two jobs to put herself through college, but six years after graduating she is still struggling to make ends meet. “I’m stabilizing after years of being in debt,” says Graham, co-founder of I Kissed Dating Hello, a website. With a monthly income of about $3,250 (she earns $250 each month from freelance writing jobs), Graham says she’s “frustrated by the constant feeling of not being able to pay the bills.”

With about $600 in savings, Graham pays $1,300 for housing and $100 for transportation every month. Credit card bills, food expenses, and miscellaneous spending cost her $1,450. As a devout Christian, she gives $350 per month in tithes to her church. Graham doesn’t have a budget, but she recently came up with a “plan” to save $500 a month.

Graham says, “I’m also trying a new system of putting $100 a week on a second bank check card that I can use for lunch and miscellaneous spending.” Graham, who is engaged, is saving for her wedding, which will be held next summer. She projects that it will cost about $5,000. “I would also like to go back to school, but I’m hoping to pay down my credit card debt first,” she adds.

Jessica Broadnax-Lawrence, a family financial counselor with Consumer Credit Counseling Service in Chattanooga, Tennessee, says Graham first needs to figure out what portion of her income should be applied to paying down debt. “Then she should budget enough to cover flexible expenses,” says Broadnax-Lawrence, who also urges Graham to save while paying debt.

“It’s better to pay double the required minimum payment amount on credit card balances, because interest accrues over time,” says Broadnax-Lawrence. “This will help her pay down her principal balances. While saving is always a good idea, weigh the interest rates of the debt and savings, and decide where your money should go.”

Depositing $100 on a bank card each week isn’t the best way to help Graham balance her spending, says Broadnax-Lawrence. Instead, she should set aside cash in the amount that she plans to spend. This way, Graham can avoid incurring bank fees or overdraft charges.

After subtracting expenses from her income, Graham ends up with $300 a month–not enough to meet her wedding savings goals (which would require $416 per month). “To be able to save enough money for periodic emergency expenses, she needs to revise her wedding budget,” says Broadnax-Lawrence.

Graham’s budget should limit household expenses to roughly 35% of her total income, and debt payments to about 20%. Other expenses (including transportation) shouldn’t exceed about 20% of total income, and savings should be 10%, according to Broadnax-Lawrence.

Because freelance income fluctuates, Broadnax-Lawrence says Graham should treat that money like petty cash and focus solely on her base salary when budgeting. “To get to solid budgeting numbers, she should use her salary only, and focus on saving the rest,” she advises, “or use it to continue paying down her debt.”

Najla Slowe understands the value of budgeting, and she knows firsthand what can happen when people let their finances unravel. As an administrative assistant and marketing consultant for a bankruptcy attorney, she works about 35 hours a week and brings home $1,800 a month. She’s tried to map out a budget for herself in Microsoft Excel, but admits that she “rarely looks at” the spreadsheet.

With two small children, Slowe is having a hard time making ends meet. “I’m in debt,” says Slowe, whose student loans are now in deferment. “My biggest financial challenge is finding a way to live within my means, while searching for a job that will increase my salary.” Slowe says she hasn’t put much time into the latter.

With no savings, Slowe spends $760 per month on housing and $260 on transportation, including gas and auto insurance. She spends about $650 on other living expenses. Her children are enrolled in after-school care that costs $264 per month. On the bright side, Slowe has no credit card debt. Even so, she’s living pretty close to the edge.

There’s little wiggle room in Slowe’s current situation, namely because moving into a less expensive apartment isn’t an option. “If I get a cheaper apartment, I may end up in a bad neighborhood,” she laments. “As a single mom, that would be pretty dangerous.”

Doug Robinson, owner and financial adviser at DouglasBradley L.L.C. in Bel Air, Maryland, says Slowe’s biggest budgeting issue is not spending, but income. With $21,600 a year coming in, and two young children to raise on her own, Slowe earning even another $5,000 a year in income could have a marked effect on her  budget, Robinson says. He advises Slowe to focus her energy on searching for a job with a target annual salary of $28,000 or more. She should also pursue some form of child support.

“If she wants a better-paying job, she has to get out there and start looking,” says Robinson. “She should also set clear financial goals and create timelines to stick to.”
Slowe might also consider sharing living space and housing costs with another single mom (perhaps someone she meets through church or a community group) in order to reduce her expenses. “Her No. 1 expense is housing, but she shouldn’t move into a bad neighborhood just to save a few bucks a month,” says Robinson.

The arrangement could last for just a year or two–enough time for Slowe to gain some financial footing. “It doesn’t have to be forever, but if sharing space and increasing her income helps her achieve her goal of financial independence by 40, then she needs to get started with these strategies today.”

Najla Slowe
Age: 33
Location: Atlanta
Family status: Single, with two children
Primary budgetary goals: “I want to organize my bills, plan for the future, and achieve excellent financial standing by my 40th birthday.”

Ideal Budget for Najla:
Based on her current income, here’s what Najla Slowe should ideally be spending, maximum, on each expense:
After-tax monthly income: $1,800
Housing costs: $630 (if she were to find a roommate to share expenses with)
Transportation costs:

Key suggestions: Find a roommate with whom she can share housing expenses; look for ways to increase annual income.

Kasheen and Regina DeMoss financial goals mimic those of most Americans. They want to pay their monthly obligations and still have enough left over to cover vacations, new cars, college educations, and retirement. Unfortunately, the pair isn’t making ends meet on their monthly income of $7,200. Kasheen works in transport operations and Regina is a customer support manager.

“I think we’re doing OK, but according to financial guru Suze Orman, we’re doing horribly for our ages,” says Regina, who admits that even when she budgets for simple needs like groceries, she regularly spends over her target amount. The pair enjoys two vacations each year, and shops for clothing and other accessories once a month.

The DeMosses have no savings, but Regina has $8,000 in her Roth IRA. They spend about $1,500 per month on housing, $700 on transportation (one car payment plus insurance and gas for both autos), and $1,000 on monthly credit card bills. Other recurring monthly expenses come to about $1,000, including food; and the family spends about $240 a month on grooming (hair and nails).

“Our youngest son will be 16 next year and will need a vehicle, and my car has more than 100,000 miles on it,” says Regina. “He’ll be attending college in three years, and we don’t have any money saved for that.” The couple’s 20-year-old son is working.

Sheila Chesney, president of Chesney & Co., in Sheldon, South Carolina, says the DeMosses should kick off their budgeting strategy by focusing on one financial goal at a time, and then figure out how to achieve it.  “It’s almost impossible to save for retirement and college and new cars at the same time,” Chesney says. “That’s how people get into trouble.” Right now, for example, she says the couple should be focused on saving for retirement by starting a retirement plan for Kasheen, and contributing regularly to Regina’s existing plan.

Kasheen & Regina DeMoss
Age: 43 (Kasheen) and 41 (Regina)
Location: Raleigh, NC
Family status: Married with four sons, two of whom live at home (ages 15 and 20)
Primary budgetary goals: “We want to save for new cars [for Regina and the couple’s youngest son], plan for our son’s college, be ready for retirement, and do a better job of investing in a 401(k).”

Ideal Budget for Kasheen and Regina:
Based on their current income, here’s what Kasheen and Regina DeMoss should ideally be spending, maximum, on each expense:
After-tax monthly income: $7,200
Housing costs: $1,500
Debt/credit card payments: $1,440
Other expenses: $1,440
Savings: $1,020
Potential Monthly surplus: $1,800
Key suggestions: Carefully assess all expenses; tell son to earn cash for his car and college expenses; cut back on vacation spending; put bulk of monthly surplus into retirement savings.

“They need to figure out the maximum they can contribute to each, and get it done,” says Chesney. She suggests setting up a plan that will allow them to replicate the income they now earn, a combined $86,000 annually, when they reach age 65.

The next step is to inject some frugality into the family budget, which is being stretched to the limit by vacations, luxuries like designer clothing, and a son who isn’t contributing financially. “You give your kids the best advantage when you teach them how to earn their own money at a young age,” says Chesney.

Unless there is an immediate need to replace Regina’s car, Chesney says the DeMosses should forgo the new car goal and instead funnel the money into their retirement accounts and college savings (the latter of which could also get a boost if their son were to get a part-time job). “There’s nothing that says parents have to pay for college,” Chesney points out. “They should encourage their son to start researching grants, loans, and scholarships, or attending a more affordable community college first. If he does well and saves some of his own money, he could transfer after two years.”

Chanel Graham

Age: 27
Location: Brooklyn, NY
Family status: Engaged
Primary budgetary goals: “I would love to have a solid plan in place, and to relieve myself of the constant anxiety I feel regarding my finances.”

Ideal Budget for Chanel:
Based on her current income, here’s what Chanel Graham should ideally be spending, maximum, on each expense:
After-tax monthly income: $3,250
Housing costs: $1,225
Debt/credit card payments: $700
Food, transportation, and other expenses: $700
Monthly savings: $325
Monthly surplus: $300
Key suggestions: Continue to pay down debt; approach wedding savings realistically; budget for emergency expenses.