2075 by Patrice Ciernia

Money Smarts How to Make Your Money Go... Where You Want It to Go!

Who needs a budget?

f you are like most people, you’d like to have more money tomorrow than you have today. Before you can decide whether a budget will help you accomplish that, you need to understand what a budget is… and isn’t. A budget is: a plan that helps you spend and save wisely.

a way to discipline your money habits so that your income buys all of the things you really need… and more of the things you want.

an aid to gain control of your spending patterns and the financial path you’re taking.

A budget is not: a substitute for common sense and self-restraint.

a magic formula to make you rich… although it can make you feel better off.

a complicated straitjacket that makes you feel guilty about buying a candy bar on impulse.

A budget is just one part of an overall financial plan. And a plan of some kind is what everyone needs in order to get where they want to go in life. It makes sense to think about budgets and financial plans as maps. They’re tools that help you to reach your goals. Like good road maps, they get you to where you are going… faster, easier, and by the most attractive route. © Life Skills Education, Inc. 2006 Edition.

#2075

All rights reserved. Material may not be reproduced in whole or in part in any form whatsoever. LSE publications provide informative, thought-provoking, and factual material. They are no substitute, however, for professional services that meet your specific needs.

Why bother with a budget? The answer is very simple: a budget is a no-cost, no-risk way to make your money go further. If you already have all the money you can use, and you can afford everything you want, and you have no risk of losing your job or suffering a personal emergency, and you have plenty of money in your savings account… then you probably don’t need a budget. But for the rest of us, a budget can make life a lot easier. Some people dislike the word “budget.” If the word makes you feel poor, penny-pinching, guilty, or depressed, call it “financial management” instead. Or, “money smarts.” Whatever you call it, in just a few hours you can put together a spending plan that will help you to live better; save more; avoid debt; and, build for your future security. This pamphlet will lead you through three steps to help you create such a plan. After the first few months, checking to make sure that your income, spending, and saving patterns are on track and following your financial plan will feel automatic to you. It won’t take you any more time to handle your money with a spending plan than without one… and you’ll find that you get more for your money, and worry about it less.

Step #1: Make a guesstimate

efore you can make a smart-money plan that will work for you, you need to know if how you think you’re spending money actually matches the reality of how you’re spending your money. 2

To begin, you’ll want to do a “guesstimate” of how much money you take in and how much you pay out in an “average” month. If what happened last month is pretty typical for you, use it as the basis to fill out the following items: 1. income:

2. spending:

take-home pay

________ housing

_______

bank interest

________ food

_______

investment income

________ utilities (light, heat, a/c)

_______

gifts/bonuses

________ utilities (phone, cable, etc.)

_______

alimony/child support ________ transportation

_______

other

________ entertainment/travel

_______

________ clothing

_______

________ insurance

_______

child care

_______

taxes

_______

savings/retirement

_______

other

_______

TOTAL

________

TOTAL

_______

The mystery of the disappearing dollars When you compare your guesstimated total income to your guesstimated total spending, you may discover that there’s a big difference between the two figures. To gain control of your money, you need to know where it’s going. You may not have any recollection of a lot of your spending: daily cash outflow can add up to as much as one-third of available income. The money’s gone, but you don’t know exactly where, when, or how. To address this issue, buy a small pocket notebook. Start, today, writing down every cash expense over 50¢. And start saving every single receipt for every transaction. 3

You won’t have to do this forever! Plan to keep the daily record of these “petty cash” expenses for one month. This helps you do two very important things: 3 find out where all your money is going, and 3 get you into the habit of keeping good records. Once you know what you’re spending your hard-earned money on, you can start making decisions about whether that’s where you want it to go. For example, if your record of daily cash expenses shows that you have a cup of coffee ($1.95) every day and a bagel or a Danish ($1.40) to go with it three times a week, then a cola ($1.25) and a snack ($1.50) most afternoons, you may not have realized that you’re spending $1300 a year on these “expenses.” A coffee here and a donut there doesn’t seem like much until you add it up!

Just for the record…

sing your checkbook, credit card receipts, and your own record of daily cash expenses, the next step is to collect (and add up) your monthly expenditures so you can take a closer look at them. (Note: Plan to start after you’ve kept your daily expenses record for at least two weeks, so you won’t have a large amount that is “unknown”.) For example, if your cash expense record shows that you spent a total of $30 on bus fares or parking last week, and last week was fairly average, it’s reasonable to estimate that you spend a little over four times that amount each month. After you’ve pulled together your financial records for this past month, do the same thing for each of the last six months (or, if you are very serious about looking at wanted. 4

where the money goes, for the past year)… this lets you average out the irregularities in your earning and spending patterns. Sort out all the paperwork (bank statements, canceled checks, credit card slips, receipts, and so on) on a month- by-month basis. An “accordion” file is a big help: label one compartment for each month or, if you prefer, by category: housing, insurance, food, etc. When you empty your wallet, pockets, or purse each night, drop the receipts from that day in the appropriate compartment. Do the same with your monthly bank statements and canceled checks, bills, receipts, ATM slips, and other financial paperwork. Good record-keeping is essential for making a realistic spending/saving plan. It will take some time to get (and keep) your records straight but, as you come to a clearer picture of where your money is going, you’ll find it’s time well spent.

Step #2: Analyze your cash flow

nce you have your records in front of you, you’re ready to do what financial advisors call a “cash flow analysis:” you’re writing down how you spent your money so that you can find out where it is going. Once you’ve got it all down so you can look at it, it will be time to compare the “guesstimate” you did in Step One to the reality of Step Two… and don’t be surprised at the significant differences between them! 5

To begin, separate each monthâ&#x20AC;&#x2122;s records into income or expenses. Make the expenses as specific as possible by breaking them down into various categories, like this: EXPENSES Savings Personal Goal savings (house, auto, college, etc.)

_________

Safety Net savings

_________

Retirement savings

_________ Total Savings _________

Taxes

Housing

Federal income tax_ _________

Rent/mortgage

State income tax __________

Maintenance (repairs, etc.) _________

Soc. Sec./Medicare___________

Insurance

_________

Real estate taxes __________

Utilities (light, heat, a/c)

_________

Auto use taxes/fees__________

Utilities (phone)

_________

Total Taxes __________

_________

Total Housing _________

Food Insurance

Groceries

__________

Health

_________

Meals out

__________

Life

_________

Drinks/snacks

__________

Disability

_________

Total Food __________

Total Insurance _________

Break down other spending areas that are important categories for you in the same way. This process helps you target those expenses where you have greater flexibilityâ&#x20AC;Ś small changes in your spending habits, over time, could mean major savings. 6

Recreation Clothing Shows (theater/movies)_ _____

Clothes

_________

Weekend trips

__________

Shoes

_________

Vacations

__________

Repairs (tailor, cobbler, etc.) _________

Hobbies

__________

Cleaning

Sports/athletic club__________

_________ Total Clothing _________

Cable TV/videos __________ Transportation Music (tapes, cd’s) __________

Gas

_________

Music lessons

__________

Insurance

_________

Newspaper(s)

__________

Maintenance

_________

Magazines

__________

Tolls/parking/public transit _________

Computer/Internet __________

Loan payment

Total Recreation __________

_________

Total Transportation _________

Total Expenses _ ___________________ (this includes all of the above: savings, taxes, housing, food, insurance, recreation, clothing, and transportation costs)

Step #3: Make a budget

nce you’ve got a clear picture of how you have been spending your money in the past, you can put that knowledge to work to create your future. If your total income is greater than your total expenses for the same time period, you’ve got “money smarts”… a head start on a strategy to make your money go farther, now and in the future. Suppose your cash flow analysis shows that your total income is less than, or almost the same as, total expenses. It’s clear that you need greater control over spending and saving… a task that is not as difficult as it seems at first. 7

Plan for the future you want To be in control of your money, you have to keep track of both your goals and your spending. Use the following model to develop your own Monthly Budget Sheet. Month of_____________________________ EXPENSES Goal

wk 1

wk 2

wk 3

wk 4

Total

Savings

________ ______ ______ ______ _______ ________

Rent/mortgage

________ ______ ______ ______ _______ ________

Loan repayment

________ ______ ______ ______ _______ ________

Food

________ ______ ______ ______ _______ ________

Property tax

________ ______ ______ ______ _______ ________

Credit cards/debt

________ ______ ______ ______ _______ ________

Utilities

________ ______ ______ ______ _______ ________

Clothing

________ ______ ______ ______ _______ ________

Transportation

________ ______ ______ ______ _______ ________

Insurance

________ ______ ______ ______ _______ ________

Child care

________ ______ ______ ______ _______ ________

Doctor/dentist

________ ______ ______ ______ _______ ________

Entertainment

________ ______ ______ ______ _______ ________

Travel/Vacations

________ ______ ______ ______ _______ ________

Charities

________ ______ ______ ______ _______ ________

Pets

________ ______ ______ ______ _______ ________

Small daily expenses ________ ______ ______ ______ _______ ________ Other (Specify)

________ ______ ______ ______ _______ ________

The money you actually spend in one month will help determine what your goal should be for that category in 8

the following month. If you find, for example, that you’re regularly overspending in one category — say, your clothing allowance — then you know that you have to make some changes. Maybe you need to leave your credit cards at home, or consider thrift shops for money-saving bargains. As time goes on, you’ll be able to track your quarterly budget, as well as your annual budget. By putting your monthly totals on a single sheet of paper, similar to the following, you’ll be able to see how you’re doing over the course of the year… your personal financial spreadsheet.

Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec

Total

Income

Expenses

Savings

Pay yourself, too The things you really want (whether that’s a house, a new car, a vacation, new furniture, etc.) will be more expensive and/or more difficult for you to acquire unless you have the savings to help you with their purchase. Whether you need money for a down payment, or want to pay cash for a purchase and avoid interest charges, you need to look at savings as an expense that you are committed to meeting… and savings are one “bill” that can help you avoid a lot of other payments in the future. It can’t be said too often: savings are an essential part of a good budget. Your personal goal (a house, a car, etc.) savings and safety net (job loss, car repair, etc.) savings are a top priority, and should come before any discretionary spending. Promising to save what’s “left over” at the end of the month means you’ll never save at all. When it comes to savings, time is your greatest ally. Even small amounts — say $50 a month — can accumulate to large ones, given enough time. 9

You may be thinking, “$50 a month! Why bother with that? That won’t get me anywhere.” Not true! If you put just $50 a month in a savings account that earns 4.5%, and you keep doing that for 25 years, you’ll have invested $15,000 of your own money and have a total of $27,942 in your account. An even better plan is to switch to a mutual fund investment after the fourth year (when you have the $2500 minimum investment such companies require); using the market’s historical average of a 10% increase from that point, you’ll make the same investment of $15,000 but your account balance will read $62,092 at the end of 25 years! Can you scrape up $100 a month to invest (which for most people is still well below that 10% figure)? Following the same scenario of a mutual funds investment, your cash outlay would be $30,000 but your balance would have grown to almost $128,000.

It’s a fact: time will make you money. The sooner you start saving, the sooner you’ll have the money you need when you really want it.

Banking smart

checking account is practically a necessity for keeping your money safe and helping you to keep good financial records. The bank and services you choose and the types of accounts you have can either be an unnecessary expense or save you money, time, and trouble. Shop around before you decide on a bank or credit union. If you… 10

…write a lot of checks each month, choose a bank that doesn’t charge you for each check. Some banks charge no fees if you keep a set minimum balance in your checking account, and a few charge no fees at all. …want to write fewer physical checks, look for a bank that offers an electronic bill pay service. …plan on using ATMs regularly, look for a bank that has machines where you’re most likely to use them — and avoid costly fees for “out of network” withdrawals. …often neglect to deposit something into savings, ask your employer if he offers direct deposit — your paycheck goes straight into your bank account, without passing through your hands — and then set up an automatic deduction from your paycheck that goes straight into your savings account. If your employer does not offer direct deposit, you can still set up an automatic deduction from your checking to your savings account and insure that you are saving for the future. …feel that it’s hard to keep track of different bills that are due at different times of the month, find out from your creditors which ones can be paid automatically through your checking account via an EFT (Electronic Funds Transfer) payment. …have trouble keeping track of your spending, buy and use a computer program such as Quicken or Microsoft Money that will automatically “remind” you of payments that need to be made and provide you with an electronic record of where your money has been going. To further monitor your spending, many credit card company statements can be downloaded into your money management program so that both your checking and credit card purchases are recorded in a single place; be aware that there will be a monthly fee for this service. 11

(Note: A computer and accompanying software are not necessary for good money management practices. To be a good money manager, you need to be consistent in keeping good records and staying on top of the information you gather. A computer is no more likely to help with that commitment than pencil and paper.)

Making more…

lmost everybody would like to increase their income. This is often possible, although it is not as easy as some advertisements and offers would like you to believe. Forget about winning the lottery. Statistically, your odds of being hit by lightning are greater than your odds of winning a lot of money from gambling or sweepstakes. Nor should you count on getting rich quick through “investment” schemes, or a patent on a gadget you built, or by writing a best-selling movie script in your spare time. But there are ways you can boost your income. They probably won’t make you rich, but they can help meet your financial needs. 3 Find part-time additional work. This can be an excellent way to make the most of any special skills you have, or to learn new ones that could be useful later on. 3 Earn more on your money. Higher profits usually mean higher risks. Don’t risk more money than you can afford to lose on an appealing investment that could go bad. Consider moving some of your savings into one or more mutual funds. While mutual funds are not insured against loss, over time they do offer considerably higher rates of return. 3 Learn to barter. For most of history, people bartered: traded what they had a lot of, for other things that they 12

If you are a computer whiz, or a creative cook, or a person who really enjoys small children, trade your time and talent for a necessary service that you’re now paying cash for: mowing the lawn, a home repair job, having the car serviced. 3 Compare benefits as well as pay. You may be better off working for less money if another job offers benefits that you need. Low-cost day care, a company car, better health coverage, or a more flexible working schedule may be worth more to you than a bigger paycheck.

…Spending less

aking your money go further is usually easier than it is to earn more. You don’t have to drastically change your lifestyle, or give up all of the things you enjoy, or become a penny-pinching miser. The plain truth is, that if you are like most people, a surprising amount of your hard-earned money just seems to spend itself without your noticing how fast it disappears. You are not getting a lot of satisfaction for that money. Which of the following changes could you make without a decline in your quality of life? (The average amount that you can expect to save in a year is listed in parentheses.) 3 Pay your credit cards on time. The unpaid balance on your card is expensive — a “great introductory offer” may mean a very low interest rate, but once that period is over, a rate over 20% a year is common! To use credit wisely, you must pay the whole balance every month… and not use your charge card for cash advances. If you don’t have the cash, don’t take the credit! And if you charge when you know you shouldn’t, turn all the cards 13

in except one for emergencies. Here’s an example. Suppose a person has a $1000 debt on a credit card on which he’s paying 21% interest. Let’s assume he charges $250 more the following month, and then makes a payment of $175 that month. The interest he’d be charged is only $17… an amount that he hardly notices. But what happens if he continues this same pattern of charging slightly more than he pays? What happens if he never pays down the debt to zero and continues to pay interest on every charge from the date it was charged (not the due date of his payment)? During the second year, his interest charges will rise to $488 for the year; the third year’s interest will be $728; the fourth’s $1008. By the end of the fifth year (and remember, he’s been charging $250 a month, and paying $175 a month… well above the credit card company’s “minimum payment”) he will pay $1337 in interest for the year, bringing the total interest he has paid during the five years to $3845. Even worse, his debt will have risen to $9345! Does this seem like an unrealistic scenario to you… something that only happens to foolish spendthrifts? Think again! The credit card debt carried by the average American household is about $9000! The fact is there are many, many people who dig themselves into a hole that then takes years to climb out of. Here again, it should be obvious that a little bit, added up, over time, makes for a lot of money. There’s a reason so many companies are in the credit card business; it’s the same reason people get so many credit card offers every year… there’s a lot of money to be made in the credit card business! (and a lot to be lost by credit card users who let their debt build a little at a time, always meaning to “catch up next month.”) 14

3 Keep your car an extra year. You’ll save the interest on the loan, as well as on insurance and taxes… and you won’t lose the 40% depreciation that typically occurs during the first two years of the vehicle’s life (an annual percentage that drops dramatically as the car ages). If you’ve maintained your car all along, you won’t be spending a lot more on repairs than you did during your car’s “middle years,” or losing much in looks and comfort. (Your savings: $1000 - $2500) 3 What price entertainment? Especially for younger people, entertainment is a big budget item. Every other week, trade in that routine Friday-night-out, for a free video on loan from the library and do-it-yourself popcorn at home with friends. In a couple of months you’ll have enough money saved to do something really special. (Your savings: $400 - $700) 3 Pack a lunch instead of eating out. Even if you only pack your lunch half the time, you’ll save a surprising amount of money. Use your lunch hour for more important and enjoyable activities than standing in line or waiting for service. (Your savings: $500 - $1000) 3 Increase insurance deductibles. “First-dollar coverage” (policies that cover you for every penny of loss or damage) is very expensive. But if you accept a larger deductible (meaning you will cover the cost of the small claims yourself and/or the first few hundred dollars of a large loss), you’ll pay much lower premiums and pocket the savings. (Your savings: $200 - $1000) 3 Build your do-it-yourself skills. Small fix-ups, like wallpapering, repairing a leaky faucet, or changing your car’s oil, are easy to learn and they don’t require expensive equipment either. But it’s costly, and inconvenient, to have someone else do them. 15

Read a book or borrow a video to learn how to do minor maintenance yourself. Even if you rent your home now, you’re probably planning to have a place of your own some day. And wherever you live, it’s nice to be independent. (Your savings: $150 - $500)

Getting it all together

ongratulations! You know where your money is coming from, and where it’s going. You’ve got a plan to pay for the things you need, buy the things you want, and save for the things you dream about. Now what? The next important step is to make realistic plans for your long-term financial success. Deciding to be a millionaire in five years isn’t a reasonable goal. Owning a home is. You can have any thing you want; you just can’t have every thing. Whether you call it a budget, financial plan, or money smarts, good money management is about making informed choices. If I buy this now, I can’t also spend the same money on that later.

If I save regularly this year, I can take a big trip next year.

If I over-use credit today, I won’t able to borrow what I really need tomorrow.

You’ve got the know-how, and you can develop the discipline, to make money-smart choices. With a good map (a budgeting plan that helps you to spend sensibly and save steadily) and a great destination (financial independence, freedom from excessive debt), you’ll make your money go where you want it to go. 16

2075 Money Smarts Does “being on a budget” sound about as appealing as “going on a diet”? Having a budget doesn’t have to mean you’re “cutting all the good things out.” The fact is that a budget can actually make it more likely you’ll get the things you want out of life. This booklet helps you find out where your money is going, name where you want it to go, and develop a three-step plan for getting there.

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