Budgeting

Introduction

The average per household debt in the U.S., not counting mortgage debt, is about $14,500. A typical credit card purchase ends up costing 112 percent more than if cash were used. A $1,000 charge on an average credit card will take almost 22 years to pay, and will cost more than $2,300 in interest ($3,300 total) -- if only 2 percent minimum payments are made. There are many families that, if faced with a sudden $1000 bill, would find it difficult to come up with the cash to pay for it.

This report will explain the hows and whys of setting up a budget that you can live with, putting together a structured savings plan and reducing your debt. I call my household budget "The Marriage Saver" because I honestly believe that it went a long way towards saving my marriage. Before budgeting our money, we would deposit our paychecks into our checking or savings account and buy what we needed or wanted. We knew that at the end of every month, we would have to pay the rent, so we kept enough in the account to take care of that. But when (notice I said when and not if) an unexpected car repair or appliance breakdown came up, we always ended up fighting about where the money would come from. After setting up the budget (and this is without any increase in our family income) the emergency money was always there. By now, some readers are going to be thinking that they can't afford to set up and maintain a budget. The fact is that you can't afford NOT to. The principles that will be explained here apply whether your family income is $10,000 or $100,000.

Setting Up A Budget

A budget is nothing more than a way of setting aside money now for expenses in the future. This can be accomplished with a loose-leaf notebook, or if you have a computer, either a spreadsheet program or a commercially available program. Plan on spending 1 to 2 hours per week maintaining your budget.

The first step is to break down all of your spending into categories. Make a list of what your money is spent on. Go through your checkbook and look at old receipts for ideas. Remember, you are not interested in what store you made your purchase in or where you bought your last hamburger. You are interested in breaking your spending down into categories. Great care should be taken to get a complete list as these are the categories that you will be saving for. If you miss one, an unexpected bill will result! Some sample categories are listed below:

Automobile Payments
Automobile Insurance
Food
Gasoline
Entertainment
Gifts
Hair care
Home Improvement
Homeowners / Renters Insurance
Property Taxes
Life Insurance
Medical
Misc. Household Expenses
Mortgage / Rent
Savings
Telephone
Utilities (Gas & Electric)
Vacation
Water
Clothing
Auto Repair
Fuel Oil
Dentist

Once you have your categories set up, you need to assign a dollar value to each. This is the amount that you will put away each week for every expense. Note that some of your expenses are paid weekly, such as food; some monthly, such as your rent or mortgage, and some quarterly, such as water bills and property taxes. With each, you will calculate the expense at a weekly rate. The weekly expenses are easy. For example, weekly food purchases can be calculated by looking through your checkbook and getting an average cost. This will become your food budget. Monthly expenses, such as rent and auto payments are a bit more work. Because some months have four weeks and some have five, you will need to use the following calculation: Take your monthly expense, multiply it times 12 (the number of months in a year) and then divide that number by 52 (the number of weeks in a month). Here's an example. Say your mortgage payment is $1200.00 per month. Multiply 1200 times 12 and you get 14,400. Divide that by 52 and you get $276.92. Round this up to the nearest dollar, which would be $277.00. This would be your budgeted amount for your mortgage. Note that on five week months, you will have some money left over. It's not really left over, though, so don't take the family out to dinner with it. It will be used during the four week months. Do these computations on every monthly expense that you have. On your quarterly bills, you will do a similar exercise. Take your quarterly expense and multiply it by 4 (the number of quarters in a year) then divide that by 52 (the number of weeks in a month.) Let's take a quarterly water bill as an example. Say your water bill is $110.00 per quarter. Multiply that by 4 to get a yearly expense of $440. Then divide that number by 52, and your weekly budgeted amount, rounded up to the nearest dollar is $9.00.

Notice in the sample categories listed above that "Vacation" and "Gifts" are listed. There is one big advantage of budgeting these yourself, as opposed to Vacation and Christmas Clubs at your local bank. With the clubs, you can't always get to your money when you need it. Vacation clubs mature in May, while Christmas clubs mature in October. That's fine until you want to take a vacation in December or you see a gift that you would like to buy for someone and it's only July. By budgeting for these items yourself, you have the control over your money.

A similar situation occurs with budgets to heat your house in the winter. Whether you use gas, oil or electricity, most fuel suppliers and utility companies allow you to set up a budget with them. They calculate your cost to heat the house over the winter months and divide that up over the entire year. This is exactly the same process that we went through calculating weekly budget amounts. You then pay the gas or oil company a fixed amount every month. That's great, except that for eight or nine months out of the year, they have your money, and are earning interest from it. By you budgeting your heating bills yourself, you earn the interest. Even if it only comes out to a few dollars in interest over the year, it's better in your pocket than someone elses.

For those who purchased their car (new or used) rather than leasing it, your loan may run for between three and five years. Once this is paid up, don't stop budgeting for it. Continue putting away the same weekly amount. This way, when it comes time to purchase another car, you will already have a sizable amount of money saved towards a down payment. Remember that the larger the down payment, the lower the amount that you will be financing. Two things are actually happening here. The first is that the money that you are saving towards your next car is earning you interest. That's free money. The second is that by reducing the amount of money that you will be financing on your next car, you are cutting the amount of interest that you will be paying towards it. More free money!

One of the categories listed is Entertainment. This is an important one. Just as all work and no play makes you a dull person, you can budget yourself out of all of your fun. Set aside a little bit each week to go out to dinner, movies etc.

Pay Yourself First

A very common practice is to make the decision to pay all of your bills first, then take what ever is left over and put that towards your long-term savings. The reality is that more often than not, there is nothing left over! By using the "Pay Yourself First" method, you incorporate a fixed amount into your budget to go towards savings every week. It's very important that you don't try to over-extend yourself here. If you budget an unrealistically high amount for savings, you will constantly be short on the rest of your budget, and will "borrow" from your savings. Borrowed money from your savings will never be repaid! It is better to set a realistic, affordable budgeted amount that you can afford, even if it's only fifty dollars a month (that's twelve dollars a week). The idea here is consistency. As your savings grows, you will want to transfer it out of your passbook savings or checking account into something that has a higher interest rate. CD's, mutual funds, stocks and bonds are some choices.

An easy way of adding to your savings is with pocket change. We all come home with some coins in our pockets, but who knows where that change ends up. Get an empty 2 litre plastic soda bottle and cut a small slot in the top. At the end of each day, deposit your change into the bottle. Don't break it open till it's full. A full 2 litre bottle can hold more than $300 worth of change. That's a nice weekend getaway, a new TV or whatever you want.

Conclusion

There's no big mystery to setting up and maintaining a budget. It's easier than you think, and doesn't take a lot of time. Give it a try. You have nothing to lose, and a whole lot to gain.