Do You Need a Budget?
Despite what most people think, “budget” is not a dirty word. Granted, it's not as great a word as “vacation” or “windfall,” but there are much worse things in life than living with a budget. A budget is a schedule of income and expenses, usually broken into monthly intervals and typically covering a one-year period.
If your net worth is not where you'd like it to be, you've got a choice. You can increase your assets, or you can decrease your liabilities.
You could get another job, but it's nice to be able to sleep now and then. Or you could start playing the lottery and sit back to wait until you hit it big. Of course, chances are you won't hit it big, and the money you've spent on tickets will make your net worth even less appealing than it is now.
If increasing your assets is not feasible at this point, you'll need to cut back on your expenses. And that's where a budget comes in. Before you begin hyperventilating, understand that a budget doesn't have to dictate every penny you spend. You don't need to account for every pack of gum or cup of coffee you buy. A budget simply is a tool to help you get a better sense of where you're spending your money, and in which areas you could spend less. A budget is a good thing.
A Sample Budget Worksheet
We've created this sample budget worksheet that can serve as a guide for your own budget. Don't assume, however, that this sample is a universal budget. We all have different expenses. Be sure to take some time to customize the worksheet to reflect your own spending.
Once you've completed this worksheet, taking into account that your areas of expense may vary, you'll have a clear picture of how much you're spending.
Cutting Back When Necessary
In the interests of improving your bottom line, it may be necessary to cut back on your spending. As a quick review, there are different types of expenses.
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Expenses can fall into more than one category. A routine expense, for instance, may be fixed or variable. If you lease a car and pay the same amount every month, that's a routine, fixed expense.
Don't Go There
When looking to reduce expenses, begin with moderate cuts. Don't decide, for instance, that you're going to reduce your food bill by 50 percent all at one time. Start at 10 percent, and see how that goes. Trying to cut back too drastically at one time may cause you to get discouraged and give up trying to save.
Routine expenses. These are the ones that get you at regular intervals. You can count on routine expenses. These include the mortgage, insurance, taxes, groceries, your health club fee, and your utility bills.
Nonroutine expenses. Your car breaks down and you've suddenly got to come up with $425. Your 22-year-old has a once-in-a-lifetime chance to spend a semester in France, and she needs $1,575 right away to reserve her spot. Your wife gets a promotion at work and you spend $200 celebrating at the best restaurant in town. These are nonroutine expenses. They don't come at regular intervals, and that makes them harder to plan for.
Fixed expenses. If expenses are for the same amount every payment period, they're called fixed expenses. Your mortgage, insurance, and health club fee are all fixed expenses.
Variable expenses. You probably don't spend the same amount in the grocery store every week. And some months you pay out twice as much for dinners in restaurants as other months. These are variable expenses. You know that you'll have them, but the amount that they'll cost you varies.
Nondiscretionary expenses. These are the ones that you can't get around. You've got to pay them. They include insurance, your mortgage, utilities, food, and so forth.
Discretionary expenses. You need to buy food, but you don't need to spend $45 a month to belong to a health club. You could, after all, take up jogging. You need to pay your insurance bill, but you don't need to spend $2,000 on a vacation. The health club, vacations, movies, restaurants (all the fun things), and so forth are discretionary expenses.
If you're like most people, it's easier to cut spending on variable expenses than nonvariable. If your mortgage is $1,500 a month, you have no choice but to pay $1,500 a month if you plan to continue living in your house. If you're spending $400 a month on food, however, there probably are ways you could reduce that bill.
Use manufacturer's coupons, or buy generic or store brands instead of name brands. Trade in the Chilean sea bass for flounder, and find some good recipes for rice and beans or pasta. Buy only what you'll use that week, even if a particular item is on sale.
Other variable expenses that usually aren't too difficult to reduce include discretionary expenses such as vacations and entertainment. That's not to say you should give up your trips, movies, and dinners out all together. After all, you've probably been working hard for 20 or 30 years now, and you certainly deserve some fun. If your net worth isn't what you'd like it to be, however, you might consider trading the cruise vacation for a week in a little cabin on a lake. Or your ski vacation in Aspen might be reduced to a couple of days at your local slopes.
Some fixed expenses you may be able to reduce or eliminate include ones such as the monthly gym fee, the $150 or so that you spend in restaurants each month, and the $70 tab you run up on your hair and nails at the beauty shop every six weeks. You might reduce your car lease payment by trading in the Lexus for a Honda.
Once you really think about it, you'll probably come up with many ways to cut your expenses. Look over the budget worksheet and see which areas seem to be the best candidates for cutting back. Come up with a plan on how you'll save, and put your plan into action.
Software to Help You Budget
How you keep your budget is a personal choice. Some people like to keep track of their spending on paper, while others prefer to do it on the computer. If you prefer a keyboard to a pencil, there are dozens of software programs especially designed to help with home budgets. Some good ones are listed here:
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If you need some ideas for how to save, pick up a copy of 1,001 Ways to Cut Your Expenses. Written by Jonathan D. Pond, it was published in 1992 by Dell Books and is available on Amazon.com.
Balance Point
Organizitall Budgeting System
Home Finances (an Excel spreadsheet)
Money Counts Personal
Quicken for Windows
Microsoft Money
A good software program might make it easier for you to set up a budget, but the only way to make your budget work for you is to control spending.
If you've been used to buying what you want whenever you want it, cutting back on or eliminating expenses might be quite difficult. Try to get yourself into a savings mindset, where figuring out how you'll reduce or eliminate expenses is something you do every time you pull out your wallet, checkbook, or credit card.
Ask yourself if you really need to buy whatever it is you're about to pay for. Obviously, if it's your mortgage bill, you'll need to write the check. If it's a new pair of shoes or a blouse, however, you might be able to tuck your checkbook back into your pocket and head home without the shoes or blouse, but with that much more money in your account.
And don't give up on your budget. You spending habits aren't the same every month, so you'll need to keep track of your expenses for several years to really get a clear picture of your spending over the long term.
Excerpted from The Complete Idiot's Guide to Personal Finance in Your 40s and 50s © 2002 by Sarah Young Fisher and Susan Shelly. All rights reserved including the right of reproduction in whole or in part in any form. Used by arrangement with Alpha Books, a member of Penguin Group (USA) Inc.
To order this book visit the Idiot's Guide web site or call 1-800-253-6476.
