You may have yawned (or cringed) when you read the title of this article, but please keep reading. This information is important for anyone who has ever worried about money or been in financial distress, which is almost everyone.
We’ve all been told over and over again to budget. But few people actually do. According to a recent study by U.S. Bank, about 60% of Americans don’t budget. This is one time you don’t want to be in the majority.
Financial success after bankruptcy is closely linked to creating and following a budget. Budgeting is an essential step to achieving your financial dreams, regardless of your income level and regardless of whether or how long ago you went through bankruptcy.
Here are 6 reasons why you need a budget:
- It will keep you out of debt. You won’t spend money you don’t have so you won’t slide into a black hole of credit card debt.
- It will reveal bad spending habits and give you a chance to correct them. You may find you are wasting money on things that matter little to you while never putting aside enough to devote to things that do.
- It will allow you to have an emergency fund so that a major repair or temporary job loss doesn’t become a crisis.
- It will help you work towards your long terms goals, whether they are home ownership, school tuition, foreign travel, or a comfortable retirement.
- It will promote family harmony by eliminating (or at least reducing) money arguments with your spouse and children.
- It will free you from constant worry about money so you can get a good night’s sleep.
Getting your finances in shape permanently is a lot like losing weight and keeping it off—planning and self-discipline over the long term are required.
Managing your finances is a three-part process: (1) tally your current spending, (2) make a budget, and (3) stick to your budget. Your goal is to keep your spending far enough below your income so that you have available a material sum each month to apply any remaining debt that was not discharged in your bankruptcy. Once your debt is clear, devote this monthly surplus to building up your savings. It is only by saving money every month that you will obtain financial stability and security.
USE AN APP OR DO IT YOURSELF?
There are dozens and dozens of online budgeting apps that can help you create a budget, such as YouNeedaBudget, Mint, PocketGuard, Wally, Good Budget, BudgetPulse, MoneyTrackin, and BudgetSimple to name a few. Some are free, while others charge a fee. They offer a variety of features depending on the app. Most can sync with your bank and credit card accounts, post your income and expenses onto a spreadsheet, and do calculations to show averages and trends with your spending. In essence, the app creates a budget for you. They also may provide budgeting advice and email feedback about your spending habits. Some will even help you find a better deal on some of your regular purchases.
Should you use one? The best budgeting method is the one you are most likely to stick with. So, by all means, investigate the apps if you are intrigued and think they may work for you. However, if you are new to budgeting or don’t have much patience with tech, you may find these apps to be daunting. Some have a significant learning curve. A low tech paper and pencil, or simple spreadsheet may be the best approach for you.
Many personal finance gurus maintain that a do-it-yourself budget is best. They believe you will have a better idea of where every dollar is going if you write down your income and expenses yourself. You can always start with this simple approach and try an app once you’ve got the basics down and have formed a budgeting habit. Or you can stick with the DIY approach permanently if works for you.
Whether you choose high or low-tech, you need to create a budget document (actually a series of documents—one for each month) that records your income and expenses. A written document that you can study and review is a must. Trying to keep a budget in your head simply will not work. There’s just too much to remember and you are too likely to fool yourself into thinking you are spending less than you actually are.
CREATING A SIMPLE DIY BUDGET
Here’s a three step process to get you started with your budget.
Step 1 Determine Your Monthly Disposable Income
Begin by determining your monthly disposable income after taxes and other deductions. For most people, that means checking your pay stub. You may also have other sources of income such as alimony, child support, social security, or pension benefits, for example.
Step 2 Tally Your Monthly Spending
One way to accomplish this is to keep a daily record of your expenditures for a month or two. Record everything you buy, no matter how small. Keeping a daily record has the added benefit of discouraging frivolous and unnecessary expenses. If you have to write it down, you will think about it more before incurring the expense. You can review your record on a weekly basis, take note of unnecessary expenses, and resolve to reduce them going forward. Many budgeting experts recommend that you continue to keep an expense journal even after you have completed your budget so that you are always aware of where your money is going.
If writing down each expense is too tedious for you and you don’t want to take a month or two to get started, you can get a good idea of your spending by reviewing your bank and credit card statements for the past several months. This method won’t track you cash expenditures. If you make a lot of cash purchases, you’ll have to get them from receipts or estimate them from memory.
Add in expenses that you pay less often than monthly, such as insurance premiums or utilities that you pay annually, semi-annually, or quarterly. Convert these amounts to a monthly expense (e.g. $1200 a year for car insurance means you need to budget $100 a month).
Assign each expenditure to a category. Some typical categories that apply to most people include:
- Housing: rent or mortgage, property taxes, insurance, utilities (electric, gas, cable, phone, trash etc.), regular repairs, HOA dues.
- Transportation: gas, car payment, registration, insurance, repairs, commuting expenses (train, bus).
- Medical: health and dental insurance, deductibles and co-pays, glasses, prescriptions.
- Personal/miscellaneous: groceries, clothing and personal items, life insurance, student and other loans and debts, child care, child support, tuition and school expenses, gifts, entertainment.
- Taxes (if not taken out of payroll): FICA, Medicare, income taxes.
Once you know where your money is going, you will be able to determine the minimum you need each month, and then make decisions how, where, and when to allocate your money.
Your spouse/partner will need to do the same.
STEP 3 MAKE YOUR BUDGET
Make a new budget at the start of every month—e.g., a January budget, a February budget. Apply your monthly income to your expenses. Your goal is to make a budget that allows you to set aside 10 to 15 or even 20 percent of your income first for repayment of any outstanding debts that survived your bankruptcy and then for saving. The older you are, the higher this percentage should be.
The easiest way to make sure you set aside your target saving percentage is to have it deducted from your paycheck and deposited in a savings or retirement account. Money is harder to spend if it bypasses your checking account and your wallet. Start with a small percentage … one you can stick with … and then periodically increase it.
As debts are paid off, you will retain more and more of these deducted funds. Eventually you will be able to keep the entire payroll deduction, and that is when you will start getting ahead. If your bankruptcy eliminated all your debts, you can begin saving immediately!
Budgeting experts recommend that, once you begin to save, you have a goal for those dollars. Your initial goal may be to establish an emergency fund of a few thousand dollars, then to save for retirement and your children’s education. Other goals may be a home remodel or dream vacation, for example. Once you decide, you can add categories for your savings on your budget. Then every dollar that comes in can be assigned to an expense or savings category and your total income minus your expenses and savings will equal zero. This is known as zero-based budgeting. Allocating every saved dollar to a specific purpose minimizes the possibility that it will be spent frivolously.
IF YOU ARE OVER BUDGET
If you are currently spending too much to reach you savings or debt reduction goal, you have two options: 1) increase your income; and/or (2) cut your expenses.
Increasing Your Income
Increasing your income may or may not be a practical solution given the nature of your job and the employment opportunities in your area. The ways to do it are obvious. You could seek a raise or better paying job; work extra hours (if they are available and you are paid by the hour); or try to get a second job. A stay-at-home spouse/partner could return to work. These choices may be undesirable as they can have a negative impact on your health and family life.
Here’s one idea that doesn’t involve a change in your employment and could give you more money in your paycheck. If you are getting a substantial tax refund each year, you could consider having less deducted from your paycheck. You won’t get the big tax refund, but spreading the income out over the year may be more beneficial to your budget. You may be more likely to save the extra money that comes every payday, than a big sum that comes once a year.
Cutting Your Expenses
These are the essential expenses your budget should provide for in order of importance:
- Housing and food.
- A vehicle where public transportation is not available.
- Insurance (auto, medical, life if you have dependants, homeowners).
- Child support, alimony.
- Student loans and tuition.
Consider trimming the following expenses to get to your goal. Some you may decide to eliminate entirely; others you may simply decide to cut back on.
- Eating out.
- Take-out food, coffee, tea, and specialty drinks.
- Premium cable channels.
- Travel and vacations.
- Club memberships.
- Gym memberships.
- Buying books, magazines, and newspapers.
- Manicures/pedicures/hair appointments.
- Spa treatments.
- Housekeeping and gardening services.
- Movies at the theater.
- Alcohol and cigarette purchases.
TIPS FOR STAYING OUT OF FINANCIAL TROUBLE
To stay out of financial trouble in the future you need to understand your financial weaknesses, and work to stay clear of them.
Reduce Reliance on Credit Cards
If overuse of credit cards got you into trouble, try living without them for awhile. Use a debit card instead, but use it as a credit card, not with your pin number. Removing cash from your wallet at purchase time makes it clear how much you are spending, unlike swiping a credit card. Once you believe you can avoid using credit cards for items you would not spend cash on, try using a card for the basics—gas, groceries, and staples. Pay off the balance every month. To rebuild your credit after bankruptcy, be sure to make all payments on time and keep your charges at or below 30 percent of your limit.
Stick to Safe Investments
If high-risk investments have cost you money, then stick to safe ones like money-market accounts, bank CDs, and short-term bonds.
Avoid Luxury Purchases
If luxury purchases are what break your budget, get some new low-cost hobbies. Stay out of the malls, off the online store sites, and out of expensive restaurants.
Use Saving Techniques
You can find hundreds of money saving techniques in books and on the Internet. Do a little research and pick a few to try that you think you can stick with. Keep adding to them. Here are just a few money-saving techniques you can try:
- Bring your lunch to work one day a week, then two, then three.
- Instead of buying books, use the library. The library may also offer free video rentals.
- Perform some small household repairs yourself. Then tackle something larger.
- Establish one no-shopping weekend a month, then two.
- If the money is not in your budget, don’t buy it.
- Declare a moratorium (3 months, 6 months, 1 year) on purchases of items you do not need, for example clothes, shoes, jewelry, collectibles, the latest electronics.
- Postpone large purchases.
- Buy used.
- Spend more time with your thriftier friends.
- Focus on living rather than acquiring.
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