Posts Tagged ‘Budgeting 101’

Reducing Expenses: Put the ‘Personal’ In Your Finances

Tuesday, March 11th, 2014

From our money & finance contributor, Kelly Whalen.

How to Reduce Your Expenses

Personal finance is called ‘personal’ for a reason. No matter what advice or best practices exist, money—how we earn, spend, and save it—is intertwined with our values, beliefs, and experience.  By exploring not only the practical side but also the personal side, you will find that you not only can ‘find’ more money, but you’ll be happier because you’ve given your personal finances careful thought.

Knowing your goals and setting up a budget that works are the first steps in putting the personal in your finances. Once you know where your money is going and how much you’re spending you can challenge yourself and your family to reduce or eliminate unnecessary spending by examining what you’re spending through the filter of your goals.

Each expense should be evaluated and considered. Is it essential? Could it be reduced? Should we be ‘investing’ more in this area?

Let’s examine a few common areas where you may be able to find savings that can really add up:

 

Trivial Spending

Buying a cup of $3 coffee at work or spending $10 on lunch out with co-workers every week may not seem like a big deal, but it can add up…and fast! Spending $30/week on those little things can add up to over $1,500/year!

Tips to Manage Trivial Spending:
Choose intentional spending instead. If you know you are going to spend money on little thing it’s best to set a budget of yourself-or an allowance. Once you’ve spent your ‘allowance’ you will have to skip the little expenses for the rest of the month. This will allow you some freedom while staying within your budget.

Stop, Think, Spend Strategy

This simple strategy will keep you from overspending. Stop before you go to the checkout counter. Think about what you’re buying. Go over a few questions in your head to get yourself to be in the moment. No justifying the clearance cost or the unnecessary stuff.

Tips for using Spending Strategy: 
Some sample questions you can either keep in mind or have a list in your wallet (ideally in front of your credit or debit card)

  • Is it a need or want?
  • Can you use something else in place of the item you’re going to purchase?
  • Can you find a better price elsewhere?

Only after you’ve given it the stop and think then and only then is it time to spend.

Lists, Lists, and More Lists

One of the best strategies I have is to always shop with a list. I keep running lists on my phone and in a notebook I carry. This includes everything we need and things I’m looking out for-like a new pair of curtains and the budget I have for those items. If it’s not on the list we don’t purchase it. This keeps me from impulse purchases (my weakness!) and allows me to keep track of things we need that may not be at the forefront of my mind.

Tips for using Lists: 
Use your phone or a dedicated notebook to keep track of your lists. There are plenty of apps that work great for this including Notes (on iPhone), Moleskine’s app, and Taasky.

Unwanted Expenses

We all have things in our budget we’d rather not spend money on-not the things we have to (like home repairs), but expenses that come from a lack of time management or organization. Some examples include; late fees, parking tickets, monthly contracts, or convenience fees. It could be you forgot to return your library books or you needed to pay a bill online that day and had to pay a $3.95/fee. You may have signed up for a ‘free’ trial and forgotten to cancel. While these may seem like small time they can add up if you aren’t careful.

Tips to Avoid Unwanted Expenses:
Avoid unwanted expenses when possible, but also make sure to have some room in your budget (Misc. category) for paying off those unwanted expenses now. To keep from making the same mistake again you can set reminders in your phone or have notes on your planner for due dates and mark down the day you should cancel a ‘free trail’.

Cutting the Cable(s)

One expense most families have is their cable bill. It can add up to more than $150 with internet access, cable channels, premium channels, DVRs, and a home phone. That’s a lot of dough! While internet access may be a requirement at home cutting the cable or dumping the home phone are both ways you can save big bucks.

Tips for Cutting the Cable:
Cutting the cable doesn’t mean never watching TV or movies! You can get a membership to Netflix, use Hulu, HuluPlus subscription, or Amazon’s Prime to stream movies and TV for cheap or free. The best part is you aren’t in a contract so you can cancel or ‘pause’ your membership at any time.

Reducing Interest Payments and Debt

The best way to reduce your expenses is to cut back on interest and debt payments. After all, saving more doesn’t make sense if you’re spending 10% or more on interest payments or more a large percentage of your earnings on debt. Debt isn’t all bad-it may allow you to pursue higher education, purchase your home, or finance a business. Revolving debt, loans, and high interest rates are an expense we should fight to eliminate.

Tips to Reduce Interest: 
While you’re working to pay off debts you can reduce interest rates by:

  • refinance your mortgage-you may be able to refinance for a lower interest rate
  • call your credit card company-call your credit card company and ask for a lower interest rate
  • switch credit card companies-0% intro rates are a great way to eliminate interest (be mindful of fees for transferring balances)
  • consolidate loans-by consolidating loans into one payment you can often reduce interest rates

What are effective ways you’ve reduced expenses?

 

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Budgeting 101: 5 Easy Steps to a Budget that Works

Tuesday, February 11th, 2014

From our money & finance contributor, Kelly Whalen.

I am so excited to introduce you to Kelly Whalen from The Centsible Life. Not only is Kelly a fantastic resource on frugal living, but she is also a dear blogging friend! Kelly has promised to walk us all through the basics of budgeting from start to finish so that you will be able to have a stronger grasp on managing your family’s personal finance. No matter when you join us, you can go back through our archives and read all of Kelly’s words of wisdom on money management. I am so thrilled she is joining us! 
Budgeting 101

Creating a budget will allow you to take charge of your money and save more than ever before. You may also find that you are able to spend on the things that matter to you whether that’s travel, home improvements, or charity when you have a budget in place.

In today’s post I’ll show you 5 easy steps to create and keep track of a budget that will really work for you and your family.

1. Where is your money now?

The 1st step to creating a budget is to sort out what accounts you have and where. For some folks this list will be small, but you may find between savings, checking, retirement, college savings, and credit cards you have more than a handful of accounts to track.

The simplest way to do this is to make a list. Include what you owe, what you’ve saved, and all your assets (savings, cars, your home, etc.). You can find a printable debt tracker at my site.

In addition to knowing where your money is you can easily tally up your debts and your assets to find your net worth too.

What is Net Worth? Assets (money, investments, value of your property) – Debts = Net Worth

Below you’ll see an example of how to calculate your net worth:

$25,000 (emergency savings) + $75,000 (retirement accounts-401k and Roth IRAs) + $125,000 (value of home) + $25,000 (value of cars)= $250,000 in assets

$5,000 (credit card debt) + $10,000 (car loan) + $15,000 (student loans) + $75,000 (mortgage)= $100,000 in debt

$250,000- $100,000= $150,000 (Net Worth)

2. What are you spending?

Now that you know what money you’ve accumulated it’s time to look at where you are spending your money. Gather up the last three months of bank and credit card statements and let’s dig in.

To start, you’ll want to use a handful of categories. If you’re using a pen and paper you can choose the categories that make sense for you. If you are using a website, app, or program like Mint or Quicken you can use their preset categories.

Some examples of categories are:

  • Savings, Retirement, and Investments
  • Charity
  • Rent/Mortgage
  • Childcare
  • Healthcare
  • Insurance (Car, Health, Life, Home, Renter’s, etc.)
  • Loans and Debts
  • Maintenance (Car & Home)
  • Entertainment (including outings and services like Netflix or cable)
  • Clothing and Personal Care
  • Food and Dining Out
  • Travel
  • Hobbies or Allowances (for kid or adult allowances)
  • Holiday
  • Misc.

With 3 months of data on hand you can see some slight fluctuations like spending increasing at the holidays or dining out costs going up when work is busy.

Now that you have that data, take a deep breathe. That’s what you did spend, and your future spending and saving habits are going to change with our next step.

3. What are your goals?

Most often we’d jump into what to cut, and we might even judge ourselves a bit when we see how much we really spend on manicures or on our kids’ clothes. Instead let’s turn that around and focus on the positive. What are your personal goals? What are your goals as a family? As a couple?

It’s time to sit down and think about what you want your money to do for you. After all, we work hard for every dollar so it should work hard for us, too!

I find this process works best if you lay out not only your own goals but the goals of your spouse or partner and family as well. For instance, your #1 personal goal may be to save for an anniversary trip with your spouse, but that goal could effect a family goal to get a family pet, or your partner’s goal to have an emergency fund that would last you a full year.

Start by writing out every goal you have. Do you have a ‘life list’ or ‘bucket list’? Include some money that will go towards those goals. Next you’ll want to order your goals. Now some will be tie for a spot on your list, and that’s ok. The idea is we want to bring the most important things to the forefront.

I recently shared this concept with a reader who sent back this list after she and her family prioritized their goals.

  1. Emergency Saving: Emergency Fund for 1 Year’s Expenses
  2. Reduce Food Spending: Learn to cook more meals, find ways to slash budget 25% by end of year.
  3. Family Trip: Save for a family trip to the Grand Canyon.
  4. Pay off ALL Student Loans: Get rid of our student loan debt by 2015.
  5. Fully Fund College Savings: Make sure both girls have enough in their accounts to fully fund their tuition.

While there were many other things the family wanted to do with their money these goals were their top 5. Once they have completed the goals they have outlined they can bump up more items from their list or reassess their goals.

Bonus Tip: Make a vision board to create a visual reminder of your goals (such as a photo of the Grand Canyon) and create a spreadsheet to track your progress.

4. Stop spending on ‘stuff’ you don’t care about.

Now that you know where your money is, where your money has been going, and where you want it to go it’s time to start making that happen. Now is the time to get really serious about where you want your money to go. Look at each and every category and assess if it’s worth the money it’s pulling away from your goals. In some cases we have no choice (yes, you need to pay your mortgage) but you can often reduce or eliminate some of your expenses.

For instance, cable TV is a great example of an unnecessary expense. Your cable bill may be close to $50/month or more if you have speciality channels. Consider cutting the cable. You can watch less TV and utilizing free or low-cost services to watch some TV and movies.

I call this process an expense audit. Each expense will be considered. Can you reduce it? Eliminate it? Choose a lower cost provider?

5. Make a budget.

Only after steps 1-4 are you able to make your budget. Using the same categories you used to assess your spending create a budget based on what you have been spending. While it’s tempting to say you’ll slash your grocery budget from $1,000 to $500 it’s not very realistic. Start with where you are, and as your spending decreases or your dump expenses that you’ve opted to do without you can adjust your budget.

The key to remember is once you’ve made a budget that it is NOT set in stone. It will guide you when it comes to your spending habits, but your budget should shift as you reduce expenses and focus on reaching your goals.

Bonus Tip: Remember that your financial goals are personal. Keep yourself on track by reminding yourself of your goals, and not looking at what the Joneses are spending.

Let’s look at a sample budget to help you get the idea.

Anna’s Family Budget
(Based on $3,000/month income after taxes, 401ks, health care premiums)

  • $250 – Savings (Retirement goes directly to her 401k)
  • $125 – Charity
  • $850 – Rent/Mortgage
  • $150 – Childcare (after-school)
  • $125 – Healthcare (this is an average spent per month on co-pays and medication)
  • $100 – Insurance (Car, Health (premiums come out of paycheck), Life, Home (included in mortgage))
  • $200 – Loans and Debts (Student Loans)
  • $200 – Maintenance & Gas (Car & Home)–goes into savings fund for repairs
  • $100 – Entertainment (including outings and services like Netflix or cable)
  • $100 – Clothing and Personal Care (clothing for 4, haircuts, makeup)
  • $400 – Food and Dining Out
  • $100 – Travel (savings or day trips)
  • $200 – Hobbies or Allowances (for kid or adult allowances)– $50/per adult, $50/child for activities
  • $50 – Holiday/Birthdays (goes into holiday savings account)
  • $50 – Misc.

Total: $3,000 Expenses

Now that we’ve covered the basics of budgeting, I want to know what you’d like to know more about in the future. Share with me in the comments!

Kelly

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