MONEY MANAGEMENT 2

People who set goals get results, often achieving more than they ever thought possible. Perhaps you’ve heard stories about people who make modest incomes that somehow manage to retire comfortably and to travel extensively. Maybe this seems unrealistic when you find yourself constantly shelling out cash for life’s unexpected expenses—like paying to have a cavity in your tooth filled, buying yet another pair of running shoes for your son or daughter, or replacing the transmission in the family car.

It seems that no matter what you do, something always comes up. That’s why setting goals is so important to helping you get what you desire—a plan can ensure that you have money for the things you want and need. And here’s where a budget comes in.

Because budgets and goals go hand in hand, you’ll find some similarities between them. Like goals, budgets should be flexible, changing with you as your life changes. Anyone with a new baby, a teenager who has moved out, or a grown child who has moved back home understands how circumstances can affect the family budget.

In this way, your budget will also be personal. Throughout this chapter, you’ll get advice and guidance to help you create a budget, but ultimately, you’ll need to base it on your goals and your own situation.

Assessing the amount of money you’ll need to reach your goals is the first step in the budgeting process. This means that you need to calculate your income, from any and all sources.

Your gross income is the amount of money you make per hour, multiplied by the number of hours you work before taxes are deducted. You pay taxes for services and programs such as education, transportation and roads, national defense, and much more. Typical tax deductions include income tax withholding, Social Security, Medicare, as well as state taxes.

Other deductions may also be taken away from your gross income. For example, if you are enrolled in your employer’s health or dental plan, you may be required to pay the insurance premium or a portion of the premium. Your employer will typically deduct your contribution to a health or dental plan directly from your paycheck. Even if you must pay for the health insurance or a portion of it, it is usually cheaper to enroll in your employer’s group plan than to try and get medical insurance on your own. Paying for your health insurance is better than going without it.

Retirement or pension plan contributions may also be deducted from your gross pay. In most cases today, employees fund their own retirement plan through contributions that are deducted from their gross pay. Making contributions to a retirement program this way is a great way to save for retirement.

Life, disability, or other supplemental insurance may also be deducted from your gross pay. After deductions, you can expect to take home somewhere around 70% to 80% of your gross pay.

Your net income is the amount you take home after all deductions are made for Social Security, Medicare, state taxes, federal withholding, insurance premiums, etc.

When making a budget, you will use your gross income from all sources less the amount for taxes, insurance paid through your employer, and retirement contributions through your employer. This is your net income or the amount you have to work with each month. Some people may have other deductions such as automatic payments for a variety of things being deducted from their paychecks. These automatic payments should be listed in the corresponding expense category on the budget form.

Create your budget based on income you know you will receive every month. If you receive overtime only sporadically, you do not include it in your monthly income. This also holds true for commissions or bonuses that you cannot rely on each month.

If you are self-employed, list the amount of money you draw from the business after business expenses and taxes. And if you receive government assistance, list the amount you receive in your assistance check as your take-home pay.

It’s likely that the first source of income you think of comes from your job, but you may have other sources as well, including Social Security, disability, pensions, dividends, interest payments, annuities, child support, alimony, or others. Take a few moments and fill out the following form, remembering to include all other sources of income that you receive regularly.

Once you have determined your net income, you can begin building your budget. Take a look at the sample budget on page __ where you will find a list of the most common household expenses. Since budgets are personal, you may have other categories to include in your own monthly budget, or some that appear here may not apply to you, but you can use this as a guide to get you started.

No matter what categories you include in your budget, you will have fixed, flexible, and periodic expenses. Fixed expenses are just that, fixed; they don’t vary from month to month. Your house or rent payment would be an example of a fixed expense. Flexible expenses vary in amount from month to month. Examples of flexible expenses include clothing, entertainment, and hair care. Periodic expenses do not occur every month; rather, they may occur every three or four months. Paying to have your license plates or tags renewed or money spent on maintaining your car are examples of periodic expenses.

As you look at the sample budget, you may be surprised to see that savings is the at the top of the form. That’s because a savings account should be an important part of your budget.

People often make the mistake of putting savings at the bottom of the budget. If you do this, it’s likely that you will never have enough money left at the end of the month to put anything in savings. If you don’t put anything in savings, how will you reach your goals? And if you don’t pay yourself first, who will? Make it a point to put savings at the top of your budget. Ideally, you should strive to save 10% of your take-home pay, but if this isn’t possible for you, save any amount you can-$25 a month is better than nothing at all.

Often times periodic expenses are also unexpected ones. If you have a car, you will undoubtedly at some point need to repair it. If you have children, you will probably incur some kind of medical expenses. If you own a home, you will likely have to repair or replace any variety of things, including the roof, the hot water heater, or the oven.

Calculating fixed expenses is easy because you can count on spending the same amount each month. Of course, flexible expenses are different. Some months the amounts are lower and other months higher, so you should use your monthly average when calculating your expenses. For example, if you want to arrive at a monthly amount you spend on clothing for you and your family, you should add up the total amount spent over the past year for all family members; then divide that number by twelve.

Even if you don’t pay monthly for some flexible and periodic expenses, you still need to include an amount for them in your monthly budget. Car repairs can quickly wreak havoc on the household budget. If you budget for car repairs and don’t have any repairs for the month, what do you do with that money? Most people end up spending it in the miscellaneous area. Unfortunately, when car repairs become necessary, they create a problem the budget cannot handle.

How can you avoid this problem? The answer lies in creating another savings account earmarked for household expenses. You can use this account for clothing, household and car maintenance, and anything else in your budget that you need or want to save for. It is important that you put the amount you have budgeted for these items into your savings account each and every month. This method of planning for future expenses will work only if you do not spend the money you set aside.

What amount should you put aside for your household expenses? People commonly ask what an ideal budget should be like, wondering what percentage of their income they should spend on food, clothing, debt, etc.

A budget should be personalized for you and your family. It’s possible to develop an ideal budget for a family of four, but what if you are a family of two or three? What if your income is different than the model? What if your debts are higher or lower? What if someone in your household has a medical problem that requires monthly treatment? The only way to take all these factors into account is for a budget to be personalized to you.

To make your own personalized budget, fill in each category on the blank budget form. Use a pencil, as you will likely need to make changes. In the column labeled “current amount,” write what you are currently spending each month in each category listed. If you don’t spend a monthly amount on a particular category, figure how much you spend on that item over a year and then divide that number by twelve. Include any amounts you write checks for, charge, or put on lay-away.

When Jim and Nancy began the budgeting process for their family of four, they didn’t include anything in the clothing category. This is because when they reviewed their checkbook register, they did not see any checks written to pay for clothing, and their first response was to leave the clothing category at zero. To assume, however, that a family of four will not need to purchase shoes, socks, coats, jeans, etc. for an entire year is unrealistic. A closer review of their finances revealed that Jim and Nancy were actually spending money on clothing, though they were charging it on their credit cards. To get a more realistic number for their clothing budget, they went back through their credit card statements and took an average of the amount of money they charged for clothing, and included that amount in their budget.

Add up the total for each and every expense. Is it more or less than your net pay? A budget should cover all your expenses and bills each month, and you should not need to use credit to make up the difference.

In order for a budget to balance, the total of all the categories must be equal to or less than your net income. If your expenses exceed your income, it is time to examine where you are spending your money and to revise your budget. For many people, the natural reaction to this problem is to cut back or eliminate the amount designated for your savings account. If you do this, how will you achieve your goals? How will you get what you want?

Cutting categories from your budget is not a good idea. Even though some expenses may not occur every month, when they do, you need the money to pay them. If you delete household savings items such as car repairs, insurance, clothing, or maintenance, you will find that you do not have the money for these expenses when they occur.

If you find yourself coming up short, look at cutting costs in your flexible expenses, particularly in the miscellaneous and entertainment categories. Reconsidering the amount you spend on eating out, cable television, cell phones, Internet service, or your morning coffee at the Java Hut can help you to free up money in your budget to make it balance and to save for more of the things you want. Once you have determined what changes you would like to make, write your revised numbers in the “adjusted amount” column on the budget form.

You should also consider where you might have spending leaks in your budget. Spending leaks are items you spend your money on automatically, almost without thinking. They can easily ruin your budget. Spending leaks are different for everyone. It may be books, newspapers, video games, music CDs, hobbies, shoes, car accessories, sports equipment, electronics, or anything else that might be standing in the way of you reaching your larger goals. Be aware of any spending leaks that may be sabotaging your efforts to balance your budget and reach your goals.

If you have made all the reductions you want, and you still cannot make your budget equal your take-home pay, then you may need to earn more money. This means you may consider taking on a part-time job or working overtime, if possible.

No matter how much juggling you do with your monthly bills, you simply cannot continue spending more than you make. Many people believe that spending a small amount here or there truly doesn’t matter. Let there be no mistake, even small amounts can add up quickly.

For instance, eating lunch out twice a week may only cost you $10 or $20, but this adds up to $40 or $80 a month, or $480 to $960 a year. What else could you do with nearly a $1000? Perhaps you could take this money to set up an emergency fund or to save for one of the goals you’ve written on your goal card. Take a look at the chart that follows to see how just a few pennies can easily compound to create a healthy savings account.

While you cannot double your money everyday, this chart shows that even saving small amounts over time definitely makes a difference. Savings accounts that earn interest work in much the same way.

If you find yourself falling short each month, you may find it helpful to begin tracking your expenses. Before you say that tracking your expenses is too much work or that you don’t have time, remember that you need to bring your budget back in balance if you want to reach your goals.

Tracking your expenses means accounting for every cent you spend whether you use cash, write checks, or make credit card charges. The best way to do this is to purchase a small pocketsize notebook available at discount stores and to carry it with you at all times. If you swing by the vending machine at work and drop in $.60 for a candy bar, write it down. If you pick up a wedding or shower gift, write it in your notebook. Whatever and wherever you spend, commit to recording it in your notebook.

Do this for at least one month, transferring the information from your notebook into the different categories on the budget form. You may find that a month of tracking your expenses gives you a firm idea of where your money is going; however, you may need to track your expenses as long as three months to get an accurate view of where you are spending your money.

For Juan, tracking his expenses became the perfect solution for plugging a spending leak. He was frustrated because he often fell short of making his monthly truck payment, so he committed to tracking his expenses for an entire month. During this month, Juan recorded all he spent, including what he paid for the coffee and the sweet roll that he enjoyed each morning during his break with co-workers.

He was amazed to learn that something as simple as eating breakfast out was costing him $5.25 every day, $26.25 a week, and $105.00 a month. After seeing the numbers before him, he set out to cut this flexible expense by at least half. He was still able to take his break with his co-workers, and at the end of the month, it wasn’t as difficult to find the money he needed for his truck payment.

When it comes to your money, you have choices, though some are easier than others. You have the choice of setting goals or not, of developing a personalized budget, of making purchases according to your goals or not. You can choose to save or to borrow money for a purchase. You will reap the rewards or consequences of the choices you make. You will either make progress towards your goals, or you won’t.

There is a compelling reason to begin today by setting your goals, developing your budget, and living within your monthly income.

Money has time value. Money not spent today, but saved, can earn interest. Interest compounds over time. Even small amounts of money can grow to large amounts of money when your money earns a return. When your money earns interest, your money is growing, giving you more money to achieve your financial goals.

Look at the chart on the following page.

If Person A begins saving at age 18 and saves $3000 a year for five years. He or she saves a total of $15,000. If Person A earns a return of 10% a year, by age 65 the initial investment of $15,000 will have grown to over $1 million.

Person B begins saving at age 28 and saves $3,000 a year for 10 years. Person B saves a total of $30,000. Person B’s investment will grow to $758,451 by age 65 based on a 10% return.

Person C begins saving at age 38 and saves $3,000 a year for 28 years. Person C saves a total of $84,000. Person C’s investment grows to $442,893 based on a 10% return.

The purpose of this chart isn’t to make you feel like it’s too late; rather, it’s to show you the power of interest to help you grow your money. The sooner you start saving the better.

The amount of time interest accrues on your money makes the big difference. If you are under 30 years old, don’t think you’re too young to begin saving. If you are over 30 years old, take heart, it’s never too late to start. If you are over 40, don’t be dismayed. Just because you didn’t start saving earlier, doesn’t mean you can’t reach your financial goals. Any amount saved makes a difference.

The easiest way to begin a savings plan is to have an amount deducted from your paycheck and sent to your bank or credit union savings account. Check with your employer’s payroll department for details. A savings account is just one of the many financial tools you have available to you to help you reach your goals. In the next chapter, you’ll learn how to put more financial tools to use and learn what financial records to keep and how long you should keep them.

Chapter Review

• A good budget is flexible, takes the stress out of managing your money, and will change with you.
• Because a savings account is key to helping you get what you want, it should be at the top of your budget.
• Budget for fixed, flexible, and periodic expenses. Watch for spending leaks, as they can keep you from obtaining your goals.
• Remember that saving even a small amount of money will make a difference. Money has time value—small amounts of money can grow into large sums over time.