1.1Budget Breakdown – Finding the Good, Bad and Ugly
Understanding where your money goes every month is a critical first step to gaining control over your finances. A close analysis of your actual spending identifies savings opportunities -- and money behaviors that perhaps should change.
Here are three ways to get an honest look at your expenditures:
Financial software – There are several free online tools that can help you get a handle on your outflow. Link your financial accounts – checking, credit cards, mortgage -- to these services and they will categorize and analyze your spending on an on-going basis.
Wela and Mint are two sources. Many financial institutions, including Bank of America, offer this function to their online banking customers.
- Spreadsheets – You can take a DYI snapshot of your spending by downloading your checking and credit card information into a spreadsheet program like Excel and sorting the outflow by categories of your own choosing. The process may take some time, but it will give you a true familiarity with your spending habits
- The Big Five -- Spot check your spending by identifying your five biggest expenditures of the past month and putting them under the microscope. As you look at each expense, ask two hard questions. Is this spend really necessary? If so, how can I reduce it next month? Considering these are your largest expenditures, they likely are obligatory – housing, food, car payment. But don’t let that stop you from asking how you can cut them. Maybe it’s time to move? Refinance? Use more coupons, or change grocery stores?
The information and insight gathered from these exercises will help you create or tweak a budget that accurately reflects your financial reality and move you towards your money goals, both short and long-term.
1.2 Sticking To Your Budget
A budget is like a fitness program. It’s a tool for achieving your goals. And, like a fitness program, no matter how good it looks on paper, it’s worthless unless executed on a consistent basis. That takes discipline. And, yes, sometimes it’s harder than we might like to stick to the plan.
Here are three ways to bolster your efforts to live within your budget:
- Envelopes – Yes, envelopes. At the start of the week, withdraw enough cash to cover your budgeted weekly spending. Place the money allotted to cover each category in an envelope – “lunch,” “gas,” “haircut,” “groceries,” et cetera. When you need to spend money take the cash from the appropriate envelop. When it’s gone, it’s gone. This system makes spending money a very real experience, something we have lost with debit cards and other forms of digital payment.
- Stash the credit card – If you aren’t carrying it, you can’t whip it out for that impulse buy, or to exceed your cash limit.
- Review your budget regularly – Look over your budget every few days. This will serve two purposes. First, it will help catch excessive spending early. Second, it will help you keep your eye on the prize by reminding you that your discipline and small sacrifices are in the service of making long-term dreams come true.
1.3 Monthly Budget/Daily Discipline
Budgets are typically based on monthly income and spending, but to be effective, a budget must be monitored and followed on a regular basis. It does no good only review your budget at the end of the month, when all you can say about overages is, “Huh, wonder how that happened?”
A Daily Spending Limit (DSL) can help keep you on track across the month. Your DSL will be calculated on your monthly income after taxes, and after you have set aside the savings necessary to meet your long-term goals. That net amount needs to cover the rest of your monthly wants and needs. Dividing that available money into daily allotments makes it easier to spot over-spending and compensate for it. If today’s trip to the grocery store went over-budget, tomorrow’s planned trip to the movies might need to be cancelled. If a flat tire unexpectedly needs to be replaced on a Friday, you and your spouse might be brown bagging it for the next week.
If a limit feels too constraining or stressful, consider implementing a weekly spending limit. Remember, the goal is to keep your spending on track across the month and avoid nasty surprises on the 31st.
1.4 Boosting the Income Side of Your Budget
There are two sides to a personal budget, of course, income and spending. Cutting expenses isn’t the only way to improve your bottom line. You can also boost your income with revenue generated in your spare time. Would an extra $200 or $300 per week make a serious difference in your finances? It’s out there – go get it!
Sell Your Expertise – Do you have a marketable skill? Could you teach music lessons? Tutor kids in math? Design websites? The Internet makes it incredibly easy (and cheap) to spread the word about your services.
Monetize Your Time – Even if you don’t have a specialized skill, you can make additional money performing routine chores, such as making deliveries, waiting in line at the DMV, or working the gate at a festival. Taskrabbit.com is the place to get started.
If you enjoy driving and are comfortable with strangers, you might also consider driving for Uber or Lyft. These popular ride-sharing services offer great flexibility and decent money. Drive whenever you want for as long as you like. You can actually sign-up for both services and switch back and forth to maximize your trips and revenue.
Sell Your Stuff -- When’s the last time you used that tennis racket or jog stroller? Are you ever going to wear that again? Whether you have one unused item or 50, maybe you should have a virtual garage sale. List your items on Craigslist, eBay or Letgo.com, and watch them fly out the door leaving a trail of money!