It’s already the 13th, and you know what that means: half of the people who created resolutions for this year have already failed at them. (Conservatively estimated, of course; it’s fully possible that even more resolutions have already met an untimely end.) Here’s hoping that you aren’t among them.
Don’t get me wrong, I understand how it can happen; it takes a lot of time and effort to keep up with even a relatively minor resolution, and more than a few of us have taken on some pretty big ones this year. Still, if you don’t keep up with them and try your best, you’re guaranteeing failure, and that’s the last thing we want when it comes to things like building up our financial foundation. Particularly when it comes to things like:
Creating a Budget
This is one of the most basic things that needs to be done if you’re hoping to improve your financial situation. I’ve touched on the subject of budgeting before, but mainly looking at how to stick to a budget. I was a bit short of advice on how to actually create a budget; unfortunately, simply adding up your spending and your earning, while technically a budget, will leave you in the same sort of situation as the US government, that is, greatly indebted and unlikely to get out.
How do you make a budget properly? Well, there are few simple steps to help you produce a workable budget, starting with:
1. Watch Where You Spend: Before you can create a budget to get you where you WANT to be, you need to see where you ARE at now. For a month or two, watch where you are spending your money. Record EVERY expense, no matter how small, from monthly bills to that can of soda you got with lunch. To get the most possible out of this, you have to be sure not to change your spending habits; if you live like a pauper while keeping track of your spending but spend like a prince when you don’t, you’re not going to get the sort of data you need to make a decent budget.
2. See Where Everything Lines Up: When you have data from a typical month or two, it’s time to see where how it fits together. Make a table of your income on one side, and your expenses on the other. (It’s helpful to divide your expenses into the regularly reoccurring kind (mortgage/rent, electric, gym memberships, etc.) and discretionary expenses (meals out, shopping, spending on those morning coffees and similar things that can vary from month to month.) Don’t forget to include expenses or income sources that don’t come every month; if you pay your automobile insurance twice a year or get investment dividends every quarter, you’ll need to factor them in, by dividing the amount by the number of months between each event.
Now, you’ll need to see whether your expenses are sustainable on your income level. This is pretty easy to see: simply total up all those expenses, total up all that income, and see which total is higher. If it’s the income, congratulations! You’re already living on less than you take in, the goal for our budgeting plan. (Well, if you haven’t already done so, you’ll need to be sure that you are doing things like putting money aside for emergencies and investing enough for your retirement; if you can do that and still be under budget, great! If not, please read on.) If your expenses are higher, well, then, it’s time to:
3. Trim Your Budget Where Possible: Yup, I know, the least fun part of creating a budget: trying to figure out what to cut. There aren’t too many rules I can give you; everyone’s life is different, and what is essential to me might be nothing but an extravagance to you. That said, things like keeping food in your belly, a roof over your head, enough gasoline in your car, and proper insurance coverage on yourself, your family and your belongings, all should take priority over things like, say, buying all the latest video games or going out to the movies. (That said, don’t give things like food spending a free ride; just because you need to eat, doesn’t mean you need to go out to eat each day of the week.) Your goal should be to cut enough spending so your income meets (or better yet, exceeds) your expenses; not an easy task, even before we look at those retirement contributions and emergency fund building (which do need to be included). When you do reach that point, it’s time for…
4. Sticking to Your Budget: You could make the best, most fantastic budget in the world, one that allows you to meet all your goals, plan for all contingencies, and still have enough money left to enjoy your life. It won’t matter if you don’t stick to it. This is tricky, no doubt about it, but important to really benefit from your budget. There is quit a bit of advice out there on sticking to a budget (much like a diet, it’s an area where many people have trouble). Here are a few tips to help maximize your chances of bucking the trend:
-Make sure your budget allows for some fun and enjoyment: Most of us aren’t would-be monks or hermits; we enjoy an active social life and plenty of fun. While it might seem like your movie budget should be the first thing to go while trying to balance your overall budget, if you don’t include some fun and free money in your budget, it’ll be no time before you simply decide not to follow it any more, period.
-Take advantage of free services: There are a surprising number of places where you can get goods and services that would otherwise cost a pretty penny for free (or at least, vastly reduced prices). Libraries offer books (and increasingly, CDs and DVDs) for nothing to members, there are free sources of information online, and speaking of online, it’s increasingly easy to enjoy all kinds of entertainment through online portals (even without relying on pirated info). Particularly with access to a decent computer (also becoming cheaper all the time), it’s possible to enjoy a full entertainment life without having to pay an arm and a leg (or any body parts, really).
-Make sure to reward your successes: We respond to rewards (and punishments); that’s just the way we are wired. To take advantage of that, try to reward yourself when manage to stick to your budget; just don’t go over budget doing it. Try this: take any money you manage to save during the month by staying under budget and split it in half; one half will be added to your savings (that emergency fund I kept mentioning before), the other half will be ‘fun money’, for you to use as you desire in the coming month. If you get to enjoy the results of sticking to your budget, you’ll be more likely to do so.