Tally Your Spending Totals After you have tracked your spending for a month, sit down with your notebook, check register, ATM receipts, and any other spending records you may have and then use all of that information to fill in the blanks under the Current Payments heading on the Budgeting Worksheet in Appendix A of this book. You will notice that the expenses on that worksheet are divided into three categories: fixed expenses, variable expenses, and periodic expenses. Fixed expenses are expenses that stay the same from month to month—your rent or mortgage payments, your car payments, and other loan payments, for example. Variable expenses are expenses that change from month to month—the amount of money you spend on clothes, entertainment, meals, dry cleaning, and so on. Periodic expenses are expenses that you do not pay each month. They may include your insurance payments, property taxes, and your child’s school tuition, among other things. Although you don’t have to pay periodic expenses every month, you should be saving for them on a monthly basis so that when they come due, you have the money you need to pay them. Therefore, for budgeting purposes, you need to translate each of your periodic expenses into monthly amounts. To do that, divide the annual amount for each periodic expense by 12 and then record that dollar figure on the appropriate line of your worksheet under the Current Payments heading. When you record your monthly expenses on the worksheet, be sure to include any debt payments you should be making but may not able to make because of lack of money. If you don’t account for these expenses on your budgeting worksheet, you will understate your total expenses and you won’t have an accurate picture of how much it costs your family to live each month. This will defeat the purpose of this exercise. If you don’t have exact amounts for your income and expenses, you may have to estimate those numbers. In this situation, I suggest that you understate your income and overstate your expenses when you complete the worksheet. Once you have recorded all of your expenses on the worksheet and have recorded totals for each category of expense on the appropriate lines of the worksheet, add them all up. The number you end up with represents the total amount of money you are currently spending each month.
Compare Your Total Monthly Income to Your Total Expenses Next, record your total net monthly income on the worksheet under the Current Income heading. When you are coming up with that number, take into account the monthly take-home pay of everyone contributing to the household expenses, which is your gross income less all deductions, including taxes, and any other source of regular reliable income you may receive, including child support or alimony payments, government benefits such as Social Security benefits, veterans benefits, Supplemental Security Income (SSI) payments, and so on. When you have all of your expense and income information recorded, subtract your total monthly spending from your total monthly income. If the number you end up with is positive, then your income is greater than your expenses, which is good news. However, if the number is negative, then you are spending more than you take in each month. That is bad news. If the news is good: Expenses are lower than income. If your monthly spending is less than your monthly income, you’ve got a budget surplus, which is a good thing. However, you may have a surplus because you are only paying the minimum due on your credit cards each month or because you are not making monthly contributions to your savings account or retirement plan. If you are paying just the minimum due on your credit cards, begin using some of your monthly surplus to pay off your credit card debts (and any other high interest debt you may have) more quickly. Your goal should be to get rid of that debt as soon as you can because the longer you take, the more interest you will pay to your creditors. The more interest you pay, the more your credit purchases will cost you. You should also review your budget worksheet to pinpoint expenses you can reduce or even eliminate and identity things you can do to live more frugally. Then, apply whatever money you save to your credit card debts, starting with the highest interest debt first. Meanwhile, until you have your credit card debts paid off, try not to use those credit cards. Ideally, your surplus (either before or after you cut or eliminate expenses in your budget) will be big enough that you can pay off your credit card debts and, at the same time, save money or increase the rate at which you are saving. Financial experts advise that you keep a minimum of six months of living expenses in a savings account as a financial safety net. Then, if you are hit with an unexpected expense—essential home repairs, medical bills, car repairs, or other expense—or if you or your spouse or partner lose your job, you can use those funds to help pay your family ’s living expenses and debts.
Without that safety net, you may run up debt on your credit cards to help pay for things. Because of the very high interest you pay for credit card debt, this is not a desirable thing. Once you have a minimum of six months of living expenses in your savings account, continue to build your savings so that you will have the money you need to help fund your children’s educations and your retirement, and to help pay for a new home, a new car, new furniture, a vacation, or something else that is important to you. Financial experts advise that you allocate at least 10 percent of your monthly income to savings. If you can’t afford to save that much right now, try to save at least 5 percent. The important thing is to begin saving something each month, even if you can only afford to save a small amount, so that saving becomes a financial habit. Over time, as your financial situation improves, you can increase the amount you are saving. However, contributing to savings comes with one caveat. If you have a lot of debt and that debt comes with high interest rates, it may be better to get the high interest debt paid off or significantly reduced at the expense of building up your savings. If you can’t afford to pay off your credit card debts faster and boost your savings at the same time, focus on paying off your credit card debts first. Once you pay off the credit card with the highest rate of interest, apply the money you were paying on that debt plus whatever else you can afford to paying off the credit card with the next highest interest rate, and so on. There is an exception to this advice, however. The exception applies if you think that your job (or your spouse or partner’s job) may be in jeopardy. In that case, unless you already have enough in savings to cover six to nine months of expenses, concentrate on building up that account as quickly as you can, and then focus on paying off your credit card debts. If the news is bad: Monthly expenses exceed your income. Since you are reading this book, I imagine that after comparing your monthly expenses and income most of you will discover that your expenses exceed your income. In other words, each month, you are probably making up the difference between your income and your expenses by using your credit cards, getting cash advances, by not paying some of your bills at all, and/or by doing without. As a result, you may be getting deeper and deeper into debt each month. You should work toward achieving two goals when you have a monthly budget shortfall. Your first and most immediate goal should be to reduce your spending by enough that your monthly income will cover all of your monthly financial obligations—your family ’s living expenses and debts. Once you have achieved that goal, your next goal should be to reduce your spending even more so you can begin saving each month. Exhibit 1.1, Spending Guidelines, indicates how financial experts generally agree you should allocate your dollars.
If your spending in any one of the expense categories exceeds what you are currently spending, you may need to focus on reducing your spending in that area. The section titled Tips for Reducing Your Spending, later in this chapter, provides specific advice for how to live on less. Exhibit 1.1 Spending Guidelines Amount of Your Income Expenses (%) Housing 25 Transportation 15 Utilities 10 Food 10 Clothing 5 Medical/Health 10 Personal 5 Entertainment 5 Other 5 Savings 10 Total 100 If you are deeply in debt, you may not be able to work toward achieving both goals right away. If that ’s the case, focus first on reducing your spending so you can live on your income, and then later, as things improve, you can work toward the second goal. It ’s also possible that you will have to increase your household income in order to achieve your first goal. That may require that you and your spouse or partner get second jobs, do freelance work, or even find better paying full-time positions. You may also want to consider asking your older children to work part time so that they can help pay some of their own expenses, assuming that their school performance won’t be jeopardized. Make budget cutting a family affair. Share your budget worksheet with your entire family, including your children. Ask everyone for suggestions on how to reduce the family’s spending and then each month review with them the progress the family has made reducing its spending. Involving your children in the process is a good way to teach them to be responsible money managers as adults. Getting your children involved in your family ’s finances at an early age will lead to important benefits for them later in life when they are managing their own money. Don’t be afraid to talk about money during your family meal times. Such conversations provide you with an opportunity to teach your children important life lessons that should pay substantial dividends throughout their lives. Maria and Jorge just can’t seem to make a dent in their credit card debts and they worry that they are spending so much money paying on those debts that they will never be able to save enough to buy a bigger home and to help their children go to college. As a result, Maria went to the library and found a book about budgeting and she and Jorge decided to put the book’s information into action. Following the book’s directions, they figured out where their money was going each month.
They were surprised by what they learned. For example, Maria and Jorge found out that their weekday restaurant lunches were costing them close to $300/month and that the monthly cost of Maria’s daily latté amounted to $60. Those two expenses alone amounted to $4,320 each year—money that they could use to pay off their credit card debts. After they identified expenses that they could reduce, Maria and Jorge met with their 12- and 16-year-old children. In their judgment, the children were old enough to become actively involved in helping manage their family’s finances. Also, Maria and Jorge felt that involving them in discussions about money would help prepare their children to manage their own finances as adults. During the family meeting, Maria and Jorge shared their family’s monthly expense and income information with their children, discussed why they wanted to pay off their credit card debts more quickly, and shared with them the things they intended to do to help achieve that goal. Maria and Jorge also asked their children for suggestions about things they could do to live on less. The 12-year-old offered to start babysitting in order to earn her own spending money and was excited about becoming more financially independent. The 16- year-old offered to get a weekend job to help pay for his own gas and car insurance. Maria said that she would post a copy of their family budget on the refrigerator and everyone agreed to meet at the end of each month to discuss how well they were doing meeting their financial goals. Everyone felt good about the challenges ahead and liked the idea that they were all pulling together. The percentages in Exhibit 1.1 illustrate what proportion of your income financial experts say consumers should spend on each of the expense categories listed in the exhibit. If you are spending a larger percentage of your income on any of the expense categories, then those are the expense categories you should target first for budget cuts. Bear in mind, however, that the percentages in this exhibit are spending guidelines, not rigid numbers. Therefore, you may need to allocate relatively more or less of your income to certain expenses. For example, if the cost of housing is particularly high in your area of the country, then spending 25 percent of your income on your mortgage or rent payments may be unrealistic, but at the same time your area may have a great public transportation system, so spending 15 percent of your income on that expense may be excessive. However, a high cost of living typically coincides with a higher than average income.
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