Life is too complicated not to be orderly. – Martha Stewart
Truer words have been never spoken. Now that you’ve admitted there are some major flaws in your budget, it’s time to get organized and decide your next steps of action.
Step 5: Getting to the root of the problem. In the last post, I mentioned that you need to take notice of overall trends in your spending. Now it’s time to take that a step further and really see where every dime you spend is actually going. Using a budget form, excel spreadsheet, or budgeting software, create some documentation for your spending. Preferably, you want this to be broken down into categories like food, housing, transportation, entertainment, etc. We use the weekly budgeting form from Joseph Sangl‘s website. It’s completely free and not only totals everything, but also computes the percentages for each category, so you can see if your spending more than you should in one particular area.
Recommended percentages: (according to Dave Ramsey)
Housing: 30% of income
Charitable Gifts: 10-15%
Debt Reduction: 5-10%
Keep in mind, this is just what’s recommended. Whatever you can do to be in the lower range or even under the percentages in certain areas will only serve as a benefit to you. When we did the math on our spending, we found that because our home is older and the payment is close to what we paid to rent our apartment, we were way below the recommendation for housing. However, we also discovered that we’re paying more for gas than our house payment and utilities combined, so we now have a real clear picture of where we need to take our next action step (more about that later).
Step 6: Take responsibility for the spending you can control. Most of us have little or no control over our monthly bills for housing or debt payments, but we do have a role to play in other types of spending like utilities, fuel, food, and entertainment. We can use less water, unplug the power strip after CSI is over, or cut coupons before our grocery runs. We can also eat out less often, check out books and movies from the library, and consolidate trips to conserve gas. After you’ve plugged in all your spending to the budget form, take note of where you’re spending unnecessarily or steps you can take to stretch a dollar in certain areas (Check out the Tip of the Week section for numerous ideas about how to pinch pennies or get the most bang for your buck).
Step 7: Organize your assets. Your money can basically be broken down into three categories: the money you earn (assets), the money you spend (outgo), and the money you keep (savings). We’ll talk a little more about that last one on Monday, but now that you’ve taken a hard look at your outgo, it’s time to focus on where you’re earning money. And I’m not just talking about your paycheck.
A financial asset is anything that brings in money that you didn’t already have. Some assets you have to work for, like your paycheck, while others earn regardless of your efforts. The latter is obviously the most desirable type of asset. I mean who doesn’t want to get paid to lay out on some tropical island and sip Pina Coladas all day? So, beyond your daily bread and butter, you are looking for stocks, interest-bearing savings accounts, CDs, mutual funds, or rental property to bring in added income. If you don’t have any of these assets currently in place, maybe your next action step is to start researching some of these avenues.
Other assets would include anything that’s completely paid for that you could sell to bring in extra income. I mention this also to explain that your house is NOT an asset until it’s paid for and could be sold for profit (which is not going to happen in the current market) or used as rental property. There’s always a lot of talk about the need for a mortgage or other debt to establish credit, so I want to debunk that myth right now. Creditors and banks want you to believe this, but I know several people who have been completely debt free at certain points in their lives (my parents included) and had no problem getting another loan for a business or establishing a home equity line. Period.
Check in on Monday for part 3 in the series when we’ll discuss saving. For questions or feedback about anything featured on The Budget Maven, you can post a comment or email me at firstname.lastname@example.org. Have a great weekend!