Thursday, November 01, 2007

Budgeting for beginners.

Below I have posted a very simplified "Sample Budget." Apparently, a lot of people are having trouble with the whole "budget" concept, so I thought I'd talk a bit about it.

First, at the top of your chart, you need to write the amount of your take-home pay under paycheck #1 and paycheck #2. If you are paid weekly, you will obviously need four columns instead of two, but you get the point. For this illustration, the chart presumes that only one spouse is employed. If both are, add another row for the second set of paychecks. If their pay-periods are staggered vis-a-vis the first spouse, then add two more columns as well. Over the tops of the paycheck columns, write the date that paycheck will be received. This is "November's" theoretical budget, so "November" is "written" at the top, along with dates for two Friday pay-periods.

The next thing you need to do is look at all of your regular mortgage and utility bills. Based on the due date, assign them to the appropriate paycheck. Utilities will generally not get bent out of shape if you are a few days late with your payment, but a week or two will make them angry. So be mindful in your assignment that for utilities, you can fudge a bit. If you are not already on "budget" plans for your electricity and natural gas or heating oil, then join the budget plan immediately.

The first year you are on a budget payment plan the only "surprising" bill you will receive is the end-of-year settlement. Be advised, though, that their computer models run on "averages" and "assumptions" and after that first year, you should adjust your monthly budget payment upward if they estimated too low for your usage. As long as you pay their minumum "budget" amount, you will be fine until the settlement next year. It is wise, however, to pay more if you feel they are lowballing your budget amount - but you can't pay less or they'll kick you off the budget plan. So at least that first year or so, you do need to keep an eye on the situation.

Also, notice on this chart that the mortgage payment is split. Most mortgage companies now offer this "accelerated payment" option where they automatically withdraw 1/2 of your payment+escrow the Monday after your regular pay-periods (you tell them when to start). They do this 26 times per year, each paycheck, which speeds up your repayment process and effectively reduces your interest payments over the life of the loan by making payments every two weeks instead of just once a month. If you haven't already joined, then you should. The benefit for you, of course, is that you don't spend half the month broke because your mortgage payment took a huge chunk from your paycheck.

So here's the Sample Budget - explanations continue below.

OK. The next thing you need to do is to collect your other bills. These probably include tuition or school supplies, car payments and/or gasoline, car insurance payments, life insurance, and various loans and credit cards. For this example, the employer provides health insurance and the fee is removed from the gross pay - therefore it is "off budget." If you pay privately, that will have to be a line item on your chart, however. Otherwise, all you need to chart is the co-pay for an office visit per month and an average RX co-pay.

You should make a schedule of regular check-ups and physicals for your family once per year - one person a month if you have 12 in your family, one person every 2 months for six persons, etc. [If you have less than 12 persons in your family, that "unused" regular budget amount on months no one is scheduled for a visit can be used for unplanned medical problems, or can be shifted to groceries or some other item on the chart at the end of the month if it isn't used for medical care.] Ditto for dental visits, which I consider medical care - 1 person per month for a family of 12, etc. The idea is to keep things staggered in such a way as to spread out the regular expenses throughout the year in a more or less systematic manner. Of course, there are going to be times when unplanned doctor visits are necessary, but you probably know how many of these a year occur on average and can pad your med/rx budget amount accordingly.

If you notice a problem with the distribution of the due dates of your credit cards and consumer loans, you can often call the company and ask them to change the due date. Each month you should write in the current balance of these cards/loans on the chart, and if they are variable/revolving interest then write down the rate. The minimum amount due each month will, of course, be on the bill - now here is where some strategy occurs. There are a couple of ways to handle debt - pay the minimum on all but one and concentrate on paying off that one ASAP, then transferring that budget amount to target #2, and so on, until they are all paid off. This will not be an instantaneous process, but if you don't charge any more, it will work. Once that first one is paid off, the rest go much faster since you're devoting more money to killing them as you go. Or, you can pay more than the minimum amount on each one and try and lower them all gradually. This will most certainly take longer and cost you more interest over time.

Either way, it is imperative not to charge any more. The point of the chart is to live within your means, and that means part of the goal is freeing up more spending money by paying less interest - and eventually by paying no interest at all.

Now, after all of those regular bills are tabulated, you see what is left for putting into savings, for groceries, clothes & shoes, and for "spending money" for each spouse, etc. These each should have their own row on the chart and be assigned to a paycheck, just like bills. You may be dismayed at how little paycheck is left after all of the bills are paid - this is normal. By seeing the disconnect between what you really have and what you need, you now have a basis for comparison shopping, changing priorities, and hopefully getting out of debt.

At the bottom of the chart you should add up all of the columns, and the amounts being spent in each column should be at or less than the take-home amount of the paycheck at the top of the column. If there are imbalances, then shift things around. If you have been living well outside of your means, then you need to do whatever is necessary to get those column totals at the bottom to be at or less than the paycheck amounts at the top.

That's the hard part, class.

Part of getting the grocery and household goods costs under control involves making another chart. In this chart, the rows are the items that you usually buy, and the columns are the 2 or 3 places where you usually shop for groceries. Be specific - brand names, sizes, etc. You can also have additional columns if there are specific bakeries or other specialty shops you have been using. You can keep your grocery receipts to start filling in the blanks, and take the chart with you a few times when you go shopping to fill in the rest. After the first month, it will probably just be a matter of quickly checking your receipts against the chart each week to make sure your prices are up-to-date. Then, you can use the grocery chart in conjunction with your coupon box to put together a menu each week (or two weeks) that stays within your budget amount.

Money you receive in rebates can be added to the next pay-period's grocery budget as soon as you receive them. Think of them as an added bonus - or better yet, put those amounts toward a credit card or loan. There's no law against sending in a loan/card payment more than once a month, you know. You can even put multiple payments to the same loan/card on your chart - each from a different paycheck! Every little bit helps and the sooner you send the payments, the less interest is added to your bill.

That's all for now, class. If you have any questions, feel free to ask.

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