EFFICIENT BUDGETING:
April 21, 2009 1:00 p.m. PST
Everybody would agree that this Economic environment has caused the need for financial action. Whether it's reducing spending, taking on a second job, refinancing a house, or even returning to the work force if you were, at one point, Retired. Before one begins the process of taking action to address these potential issues, one needs to review their Budgeting process. The most important aspect to this process is to complete an Expense Worksheet. In essence, an Expense Worksheet will not only help Financial Professionals to use this data to compile a plan moving forward, but more importantly, it helps you to see for yourself, what your expenses truly are. Unless this is a written document, you will never truly grasp potentially unnecessary expenditures.
One question as it pertains to the equation is really quite simple; does my Income exceed my Expenses? If the answer is a resounding "no," it is obvious that something needs to change. This involves either an increase in Income (which is not always an easy option), or a decrease in Expenses (much more viable, but maybe not as easy as it appears). Start by splitting your expenses into two categories. First, look at all the required expenses such as mortgage, utilities, food, clothing, medical etc. Then look at discretionary spending, this is where real headway can begin. We all should have some entertainment and leisure in our budget. However, we often spend more than we need to lead a satisfying life. Rather than dining out so often, do we conserve expenses by making meals at home? Do we cut the amount we spend on non-essential items, such as alcohol or clothing? There are probably some pundits out there expressing some thoughts on these questions, perhaps what I think are non-essential, others may seem as essential. Maybe purchasing a new pair of shoes makes you feel good, but the real question is, "do I really need this, or is it rather something I want?"
Budgeting can come in many forms, 1) from a simple plan to allocate a certain amount of money per month to food, utilities, credit card bills, mortgage and entertainment; or, 2) or the more complex Financial Plan, to address your Income and Expenses, and determine areas which could use improvement. Personally, I prefer the stability of using an Expense Worksheet and adhering to the principle of making adjustments where needed. Speaking from experience, I had put off completing an Expense Worksheet for quite some time, simply because I did not want to face the fear of knowing that what I thought was financial independence, would turn out to be wrong; who ever wants to admit that they've made mistakes?! Once I finally did complete a comprehensive review of my Expenses, I was quite shocked at how much I was spending, which could be reconsidered. As a result, I personally changed several things; 1) I reduced expenses which were not in line with "normal" spending habits, and 2) I developed a strategy to ensure a long-term strategy to address, in order to retire comfortably.
In order to understand the importance of budgeting, it's pivotal to understand the reasons everybody needs a budget:
- Understand your real reason and need for budgeting. Is it to live comfortably now? Or be able to sleep well at night?
- To plan for Retirement or other goals, such as travel during Retirement.
- Understanding one's budget, helps to manage one's debt. Adhering to a program that limits spending to an amount below net after tax income will prevent unnecessary debt.
- Being able to live within your means. Savings and investments amounts need to be considered as part of the process
- Building reserves, balancing cash flow is all about reducing stress and creating peace of mind.
- It is essential to understand your Fixed expenses versus your Variable expenses.
- It's nice to know that there is money in the proverbial "till" every month, for entertainment allowing you to do something you really enjoy.
The following are strategies to address your Budgeting concerns:
- Use an Expense Worksheet to first understand where your money is being spent.
- Track any changes to your future budget expenditures.
- Identify ways to increase Income, in order to offset unforeseen expenditures.
- Ask friends and/or family, to go through the same process, so that you can see a common thread, or something that is skewed. It may be uncomfortable, but objective advice can be very beneficial. You may want to consider the advice of an expert.
- Are there Emergency Funds set aside to take care of unexpected events?
- Is your spouse involved with the Budget process? If not, there is no better way to get on the same page and live a happier life. For an example of this, see the following news story entitled "Recession-Proofing your Marriage," from San Diego's NBC affiliate, KNSD 39, Recession-Proofing Your Marriage .
Consider making drastic changes. If you can't make your budget work, consider the following:
- If you're spending too much on your home/condo, and don't need the extra space, consider downsizing.
- Consdier increasing deductibles on insurance policies including: homeowners, automobile, umbrella and health coverage, hence lowering your premiums.
- Consider getting rid of extra appliances like the refridgerator or spare tv to reduce utility bills.
- Understand the difference between needs and wants. Many purchases fall into the category of wants.
- Educate yourself with books and referrals from friends who have gone through the process.
The bottom line is that everybody needs a budget, the difference is how one uses it to implement a solid strategy to effect positive change in one's life. Whether you analyze it yourself, or seek help from a Financial Professional, you will certainly feel that the creation of a budget from which to work, will help you to determine a financial strategy moving forward, and will help to ease some of the worries that are rearing their ugly heads during this tough Economic environment.
Please share your thoughts and ideas on the topic of this Budgeting. What has worked for you?. I am happy to respond if you need further assistance.
Attached you will find the Expense Worksheet posted on NBC's website, which is Interactive and will get you started with the process. I hope this article has helped others and is shared amongst others in the Blogosphere.
Regards,
Mark Halsey
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