Why You Need A Budget

WHY BUDGET?

You may have yawned (or cringed) when you read the title of this article, but

please keep reading. This information is important for anyone who has ever

worried about money or been in financial distress, which is almost everyone.

We’ve all been told over and over again to budget. But few people actually do.

According to a recent study by U.S. Bank, about 60% of Americans don’t budget.

This is one time you don’t want to be in the majority.

Financial success after bankruptcy is closely linked to creating and following

a budget. Budgeting is an essential step to achieving your financial dreams,

regardless of your income level and regardless of whether or how long ago you

went through bankruptcy.

Here are 6 reasons why you need a budget:

1. It will keep you out of debt. You won’t spend money you don’t have so you

won’t slide into a black hole of credit card debt.

2. It will reveal bad spending habits and give you a chance to correct them.

You may find you are wasting money on things that matter little to you while

never putting aside enough to devote to things that do.

3. It will allow you to have an emergency fund so that a major repair or

temporary job loss doesn’t become a crisis.

4. It will help you work towards your long terms goals, whether they are home

ownership, school tuition, foreign travel, or a comfortable retirement.

5. It will promote family harmony by eliminating (or at least reducing) money

arguments with your spouse and children.

6. It will free you from constant worry about money so you can get a good

night’s sleep.

Getting your finances in shape permanently is a lot like losing weight and keeping

it off—planning and self-discipline over the long term are required.

Managing your finances is a three-part process: (1) tally your current spending, (2)

make a budget, and (3) stick to your budget. Your goal is to keep your spending far

enough below your income so that you have available a material sum each month

to apply any remaining debt that was not discharged in your bankruptcy. Once

your debt is clear, devote this monthly surplus to building up your savings. It is only

by saving money every month that you will obtain financial stability and security.

USE AN APP OR DO IT YOURSELF?

There are dozens and dozens of online budgeting apps that can help you create

a budget, such as YouNeedaBudget, Mint, PocketGuard, Wally, Good Budget,

BudgetPulse, MoneyTrackin, and BudgetSimple to name a few. Some are free,

while others charge a fee. They offer a variety of features depending on the app.

Most can sync with your bank and credit card accounts, post your income and

expenses onto a spreadsheet, and do calculations to show averages and trends

with your spending. In essence, the app creates a budget for you. They also may

provide budgeting advice and email feedback about your spending habits. Some

will even help you find a better deal on some of your regular purchases.

Should you use one? The best budgeting method is the one you are most likely

to stick with. So, by all means, investigate the apps if you are intrigued and think

they may work for you. However, if you are new to budgeting or don’t have

much patience with tech, you may find these apps to be daunting. Some have a

significant learning curve. A low tech paper and pencil, or simple spreadsheet

may be the best approach for you.

Many personal finance gurus maintain that a do-it-yourself budget is best. They

believe you will have a better idea of where every dollar is going if you write down

your income and expenses yourself. You can always start with this simple approach

and try an app once you’ve got the basics down and have formed a budgeting

habit. Or you can stick with the DIY approach permanently if works for you.

Whether you choose high or low-tech, you need to create a budget document

(actually a series of documents—one for each month) that records your income

and expenses. A written document that you can study and review is a must. Trying

to keep a budget in your head simply will not work. There’s just too much to

remember and you are too likely to fool yourself into thinking you are spending

less than you actually are.

CREATING A SIMPLE DIY BUDGET

Here’s a three step process along with a simple budget worksheet to get you

started with your budget.

Step 1 Determine Your Monthly Disposable Income

Begin by determining your monthly disposable income after taxes and other

deductions. For most people, that means checking your pay stub. You may also

have other sources of income such as alimony, child support, social security, or

pension benefits, for example.

Step 2 Tally Your Monthly Spending

One way to accomplish this is to keep a daily record of your expenditures for a

month or two. Record everything you buy, no matter how small. Keeping a daily

record has the added benefit of discouraging frivolous and unnecessary expenses. If

you have to write it down, you will think about it more before incurring the expense.

You can review your record on a weekly basis, take note of unnecessary expenses,

and resolve to reduce them going forward. Many budgeting experts recommend

that you continue to keep an expense journal even after you have completed your

budget so that you are always aware of where your money is going.

If writing down each expense is too tedious for you and you don’t want to take

a month or two to get started, you can get a good idea of your spending by

reviewing your bank and credit card statements for the past several months. This

method won’t track you cash expenditures. If you make a lot of cash purchases,

you’ll have to get them from receipts or estimate them from memory.

Add in expenses that you pay less often than monthly, such as insurance premiums

or utilities that you pay annually, semi-annually, or quarterly. Convert these

amounts to a monthly expense (e.g. $1200 a year for car insurance means you

need to budget $100 a month).

Assign each expenditure to a category. Some typical categories that apply to

most people include:

• Housing: rent or mortgage, property taxes, insurance, utilities (electric, gas,

cable, phone, trash etc.), regular repairs, HOA dues.

• Transportation: gas, car payment, registration, insurance, repairs, commuting

expenses (train, bus).

• Medical: health and dental insurance, deductibles and co-pays, glasses,

prescriptions.

• Personal/miscellaneous: groceries, clothing and personal items, life

insurance, student and other loans and debts, child care, child support,

tuition and school expenses, gifts, entertainment.

• Taxes (if not taken out of payroll): FICA, Medicare, income taxes.

Once you know where your money is going, you will be able to determine the

minimum you need each month, and then make decisions how, where, and when

to allocate your money.

Your spouse/partner will need to do the same.

STEP 3 MAKE YOUR BUDGET

Make a new budget at the start of every month—e.g., a January budget, a February

budget. Apply your monthly income to your expenses. Your goal is to make a

budget that allows you to set aside 10 to 15 or even 20 percent of your income

first for repayment of any outstanding debts that survived your bankruptcy and

then for saving. The older you are, the higher this percentage should be.

The easiest way to make sure you set aside your target saving percentage is to have

it deducted from your paycheck and deposited in a savings or retirement account.

Money is harder to spend if it bypasses your checking account and your wallet. Start

with a small percentage … one you can stick with … and then periodically increase it.

As debts are paid off, you will retain more and more of these deducted funds.

Eventually you will be able to keep the entire payroll deduction, and that is when

you will start getting ahead. If your bankruptcy eliminated all your debts, you can

begin saving immediately!

Budgeting experts recommend that, once you begin to save, you have a goal

for those dollars. Your initial goal may be to establish an emergency fund of a

few thousand dollars, then to save for retirement and your children’s education.

Other goals may be a home remodel or dream vacation, for example. Once you

decide, you can add categories for your savings on your budget worksheet. Then

every dollar that comes in can be assigned to an expense or savings category and

your total income minus your expenses and savings will equal zero. This is known

as zero-based budgeting. Allocating every saved dollar to a specific purpose

minimizes the possibility that it will be spent frivolously.

A Simple Budget Worksheet

You can use this form as a starting point for your monthly budget. If you have

Excel or another spreadsheet program, you can use these categories to make

a spread sheet that will do the math for you. Or you can find a number of free

simple budgeting spreadsheets and templates online that you can download.

MONTHLY BUDGET (MONTH)

INCOME

Net earnings

Income from other sources

TOTAL INCOME

EXPENSES

HOUSING

Mortgage/Rent

Real estate taxes

Property insurance

Heat

Electricity

Water/sewer

Trash

Telephone

Cable/Internet

Other

TOTAL HOUSING

MONTHLY BUDGET (MONTH)

TRANSPORTATION

Car payment

Gas

Repair/maintenance

Registration

Insurance

Taxes

Commuting/Other

TOTAL TRANSPORTATION

MEDICAL

Health insurance

Deductible

Doctor

Dentist

Optical

Prescriptions

Other

TOTAL MEDICAL

MONTHLY BUDGET (MONTH)

PERSONAL/MISCELLANEOUS

Groceries/Food

Clothing/Personal care

Daycare

School tuition

Child support

Life insurance

Student loans

Recreation/Entertainment

Vacation

Gifts/Contributions

Other

TOTAL PERSONAL/MISCELLANEOUS

TAXES NOT DEDUCTED FROM PAYCHECK

FICA

Medicare

Federal

State

TOTAL TAXES

TOTAL EXPENSES

BALANCE available for debt reduction/

savings (Total income - Total expenses)

IF YOU ARE OVER BUDGET

If you are currently spending too much to reach you savings or debt reduction

goal, you have two options: 1) increase your income; and/or (2) cut your expenses.

Increasing Your Income

Increasing your income may or may not be a practical solution given the nature

of your job and the employment opportunities in your area. The ways to do it are

obvious. You could seek a raise or better paying job; work extra hours (if they are

available and you are paid by the hour); or try to get a second job. A stay-at-home

spouse/partner could return to work. These choices may be undesirable as they

can have a negative impact on your health and family life.

Here’s one idea that doesn’t involve a change in your employment and could give

you more money in your paycheck. If you are getting a substantial tax refund each

year, you could consider having less deducted from your paycheck. You won’t

get the big tax refund, but spreading the income out over the year may be more

beneficial to your budget. You may be more likely to save the extra money that

comes every payday, than a big sum that comes once a year.

Cutting Your Expenses

These are the essential expenses your budget should provide for in order of importance:

• Housing and food.

• Utilities.

• A vehicle where public transportation is not available.

• Insurance (auto, medical, life if you have dependants, homeowners).

• Child support, alimony.

• Taxes.

• Student loans and tuition.

• Savings.

• Entertainment.

Consider trimming the following expenses to get to your goal. Some you may

decide to eliminate entirely; others you may simply decide to cut back on.

• Donations.

• Gifts.

• Eating out.

• Take-out food, coffee, tea, and specialty drinks.

• Premium cable channels.

• Travel and vacations.

• Club memberships.

• Gym memberships.

• Buying books, magazines, and newspapers.

• Manicures/pedicures/hair appointments.

• Spa treatments.

• Housekeeping and gardening services.

• Movies at the theater.

• Alcohol and cigarette purchases.

TIPS FOR STAYING OUT OF FINANCIAL TROUBLE

To stay out of financial trouble in the future you need to understand your financial

weaknesses, and work to stay clear of them.

Reduce Reliance on Credit Cards

If overuse of credit cards got you into trouble, try living without them for awhile.

Use a debit card instead, but use it as a credit card, not with your pin number.

Removing cash from your wallet at purchase time makes it clear how much you

are spending, unlike swiping a credit card. Once you believe you can avoid using

credit cards for items you would not spend cash on, try using a card for the

basics—gas, groceries, and staples. Pay off the balance every month. To rebuild

your credit after bankruptcy, be sure to make all payments on time and keep your

charges at or below 30 percent of your limit.

Stick to Safe Investments

If high-risk investments have cost you money, then stick to safe ones like moneymarket

accounts, bank CDs, and short-term bonds.

Avoid Luxury Purchases

If luxury purchases are what break your budget, get some new low-cost hobbies.

Stay out of the malls, off the online store sites, and out of expensive restaurants.

Use Saving Techniques

You can find hundreds of money saving techniques in books and on the Internet.

Do a little research and pick a few to try that you think you can stick with. Keep

adding to them. Here are just a few money-saving techniques you can try:

• Bring your lunch to work one day a week, then two, then three.

• Instead of buying books, use the library. The library may also offer free

video rentals.

• Perform some small household repairs yourself. Then tackle something larger.

• Establish one no-shopping weekend a month, then two.

• If the money is not in your budget, don’t buy it.

• Declare a moratorium (3 months, 6 months, 1 year) on purchases of items you do

not need, for example clothes, shoes, jewelry, collectibles, the latest electronics.

• Postpone large purchases.

• Buy used.

• Spend more time with your thriftier friends.

• Focus on living rather than acquiring.