"Budget" is a dirty word to many people. It sounds restrictive and confining, but it doesn't have to be. Budgets give you control over your financial life. Once you figure out where all your money is going, you can make sure that you're spending money where you intend to. You can start to put some money toward the goals you really want to reach, such as that dream vacation or a new deck for the house.
Many financial planners don't like the word "budget" because of its negative connotations. Instead, they call it a "savings and spending plan." It's a way to set financial priorities. Before you get to setting goals, you need to take stock of where you're spending your money today. To help you get started, check out our budget planner at the end of this story. Really give it a try to discover where your money is going.
"When someone tries to lose weight, the more they track what they're eating and how much they exercise, the better they do,'' says Mary Jane Johnson, a certified financial planner with Horwitz & Associates in Morton, Il. "It's very easy to eat something unconsciously and it's very easy to spend money unconsciously. Be aware of the present and you can make proactive changes."
Planners say people are often surprised to see where their money is really going each month. The way to find out: either collect all your receipts from the past few months (and use your checkbook and credit card bills to help) or start saving your receipts for the next few months.
Fixed expenses are easy to track. These are costs you have every month, such as your mortgage or your car payment. Utilities, taxes, groceries, health insurance, car insurance, retirement savings, dance classes, and piano lessons, for example, usually stay the same. Even though these expenses don't change much, you still should keep track of them so you know how much of your income is going towards certain items.
For some of these fixed expenses, financial experts recommend caps on how much you should be spending. Take housing, for instance. Generally, planners recommend that housing use up no more than 25 percent of your pre-tax income.
"Even if a person can get a mortgage to afford more house, they're not going to live within their means if it means their neighbors make more money and they feel they must keep up with them in other ways," says David Bross, a certified financial planner with DS Bross Financial Advisory in Leominster, Mass.
Next, planning for any long-term goals -- such as retirement, college savings, or saving cash to an emergency fund -- should be placed in the "fixed" column. If you wait until the end of the month to fund these goals, you could very well find there's no money left. Instead, pay yourself first.
Johnson says establishing a regular savings plan, such as a 401(k), is the easiest way to start saving for retirement. She says you should try to save 10 percent of your pre-tax income for retirement. More is better, though: save as much as you can, and consider aiming for a higher percentage, like 15, 20, 25, or even 30 percent. Currently, the national average is only 8.2 percent, which is still fairly low.
If you decide ten percent is your target, but money is tight, here's one way to save. If your employer offers a match, you could put less of your own dollars towards savings. If your boss matches 50 percent of the first 6 percent -- which comes to 3 percent of your pre-tax salary -- you'd only have to pony up 7 percent to reach the 10 percent goal.
Once you've determined your fixed expenses, it's time to track your variable expenses, or those costs that change from month to month. For example, your dining-out bill and your entertainment costs probably vary from month to month. Because these bills change, add up a few months' worth of receipts and figure out an average.
When you have a complete list of fixed expenses and variable expenses, add them up. Then, deduct the total from your income to see if you're coming out ahead or if you're behind.
If your budget doesn't balance, don't fear. There are places to cut back without dramatically altering your lifestyle. There are some telltale areas in a budget where many people overspend.
You'll probably find more room in your budget in the variable expenses category, but check out your fixed expenses. Could you refinance your mortgage for a lower monthly payment? Do you really need 400 channels and a pricey satellite TV bill? As for variable expenses, perhaps you'd feel comfortable eating out one night less per month. Or maybe you could rent movies more often and cut back your visits to the theatre.
Elizabeth Jetton, a certified financial planner with Financial Vision Advisors in Atlanta, Georgia, says all families have something of a black hole where money seems to vanish each month. She suggests the following areas to watch:
- Too much cash. If you carry less, you may spend less. "People spend whatever cash they have and they can't remember what they spent it on, like too many lattes or fast food items they wouldn't buy if they didn't have cash," Jetton says.
- Too much food. Jetton says many families spend excessively on groceries and eating out. Are you? If you tend to throw out a lot of food because you end up ordering a pizza instead of cooking, spend less at the supermarket on meals that never get prepared.
- Too many gifts. Or perhaps the gifts are too expensive. "We overspend for weddings, Christmas, or someone's birthday. Set limits and be creative," Jetton says. Many people enjoy a personal card as much as an expensive gift.
- Too much mall or shopping time. Jetton says when there's nothing else to do, many of us head to the mall. You'd be better off going to the movies, she says, because you won't spend as much. Or find other ways to enjoy yourself that don't involve spending money.
"The most important choices we make are the day-to-day choices about how we spend our money," says Jetton. "It should be our priority because it's what affects our ability to reach our long-term goals."
Grab your pay stubs, your checkbook, your credit card statements, and other receipts to see where your saving and spending plan stands. Print this worksheet and fill in the blanks. At the end of the worksheet, subtract your total expenses from your total income, and see where you land.
Salary (Pre-tax) _________ Bonus/Overtime __________ Alimony/Child Support __________ Social Security/Retirement Distributions __________ Rental Income/Investment Income ___________ Gifts __________ Other __________ Total Monthly Income _________
Housing __________ Mortgage or Rent ___________ Property Taxes/Condo Fee ___________ Insurance ___________ Maintenance ___________ Total Housing Expense _____________
Gas/Oil __________ Electricity __________ Water/Sewer __________ Garbage Collection __________ Cable TV/Satellite __________ Telephone/Cellular Telephone __________ Internet Service __________ Total Utilities Expense ___________
Groceries __________ Dining Out __________ Snacks __________ Total Food Expense __________
Car Loans/Car Leases __________ Car Insurance __________ Repairs __________ Gasoline __________ Tolls __________ Parking __________ Total Transportation Expense __________
Clothing __________ Toiletries __________ Hair Salons/Manicures __________ Gym or Health Club Membership __________ Dry Cleaning __________ Total Personal Care Expense __________
Day Care __________ Babysitting __________ Activities __________ Total Child Care Expense __________
Tuition __________ Student Loans __________ Room and Board __________ Books and Supplies __________ Total Education Expense __________
Health insurance, co-payments and deductibles __________ Dental Care __________ Eye Care __________ Life Insurance __________ Disability Insurance __________ Total Insurance Expense __________
Investments 401(k) plan __________ College Funds __________ IRAs __________ Mutual Funds __________ Stocks __________ Cash Savings __________ Total Investments Expense __________
Federal __________ State __________ Local __________ Social Security __________ Medicare __________ Estimated Tax Payments __________ Total Taxes Expense __________
Banking and Credit
Credit Card __________ Bank Fees __________ Total Banking and Credit Expense __________
Newspapers/Magazines/Books __________ Movies/Videos __________ Music/Concerts __________ Hobbies __________ Sports __________ Other Events __________ Vacations __________ Total Entertainment Expenses ___________
Pet Care __________ Gifts __________ Other __________ Total Miscellaneous __________
Add together these sub-categories to get your total monthly expenses:
Total Housing Expenses __________ Total Utilities Expenses __________ Total Food Expenses ___________ Total Transportation Expenses __________ Total Personal Care Expenses __________ Total Education Expenses __________ Total Child Care Expenses __________ Total Personal Insurance Expense __________ Total Investments Expense __________ Total Taxes Expense __________ Total Banking and Credit Expense __________ Total Entertainment Expenses __________ Total Miscellaneous __________ Total Expenses: __________
Subtract your expenses from your income. If you get a positive number, then your budget is in balance and you can think about putting the leftover money toward some of your goals. If you get a negative number, take a closer look at your expenses to see where you could cut back.
Total Income ________ minus Total Expenses ________ equals ________________.
Karin Price Mueller is a columnist for The Boston Herald and author of Online Money Management (Microsoft Press).