Sunday, September 23, 2007

In The Red?

After you've tracked your spending for a while, time to take a look-see and crunch some numbers.

You'll want to sort your spending by categories. Typically, the categories would include some fixed expenditures, such as mortgage/rent, utilities-- things that you simply must pay. Also there will be plenty of more flexible spending categories-- groceries and eat-out, clothing and other personal care, entertainment.

Take a look now and try to think of any other expenditures that come up during the year. Things that may not have happened during the time you were tracking, but you know will come up. Insurance and taxes, gift-giving, household repairs...

There are two different things you'll need to do now. One is to categorize the spending you've done, add up the numbers, and compare that to your income. Are you in the red? Hmmm, you'll want to fix that! And how you do it is up to you- look at your flexible categories and see where you can cut back.

At this point in the conversation, let me bring up the most important thing of all: PAY YOURSELF FIRST! Ideally, at least 10% of your income should go to savings. Maybe you can't do 10% right now. Start with what you can. You want to get at least a month's worth of income in your savings account. More later. For now, a month's worth is your goal.

Alot of people wonder about debt and savings. If you have debt, shouldn't you pay that off first, instead of saving? Nope. Not having savings is probably why you have debt in the first place. You want to pay off the debt, but you HAVE to get something in savings too. The savings account is your life-saver for the unexpected. There are several methods to debt reduction, but this isn't a post about that, it's about budgeting! We'll deal with debt in a little while.

In addition, you'll want to have money put away for expenses that happen irregularly, but are inevitable. Mary Hunt calls this a Freedom Fund. Things like property taxes, major home repairs, having your tires rotated- those are things that can trip up a budget in a hurry. Don't confuse that money with your savings account, it's not the same thing. Property taxes aren't an "emergency", you knew you'd have to pay them. What you want to do, is take all those expenditures that are irregular but expected, add 'em up, and divide the total by 12. That's how much you should set aside every month to cover those things.

So now you have your regular spending categorized, and figured out how much to put in savings and your Freedom Fund. Are you in the hole yet? If not, great! If you are, take another look at things. Something's gonna have to go.

At this point in the process you can start loading information into whatever system you've chosen to use. Since you've been tracking your spending, you should know exactly how much money you have.

Of course this all sounds a little too easy, right? There are plenty of potential problems in this process and this is a really glossy overview. I'll be back to talk about some of them in a bit.

1 comment:

CrochetAddict said...

Hi, Becky! It sure is nice to be here with some friendly faces. Can't wait for the rest of our friends to join us.

Regarding finances and budgets, quite by coincidence........DS (Dearest Son) was visiting this weekend and he asked for advice. I've been waiting for this day! (Hands folded in prayerful gratitude!) We had talked several years ago, but it "didn't take". LOL!! Tonight he actually seemed motivated and energized, couldn't wait to get back to his apt. to get started.

Budgeting reminds me of "dieting":
1. Nothing works until you are truly ready for a permanent change.
2. There are different methods that work for different people. Find what works for you.
3. Motivation follows action. Once you get started, the positive results motivate continuing the process.
4. It's not a one-time shot, but rather, a change in lifestyle.

CrochetAddict soon to be known as KT.