Budgeting and getting your finances under control

I've been reading lately several books by Dave Ramsey.
What I've noticed is that if you have a budget you'll be able to get your finances under control and you will also be telling  your money where you want it to go and making it work for you.



So what is a budget?

As I understand it a budget consists of what you have to spend and then the allocations on what you want to spend it on.  Seems fairly simple right?   It basically is though many people including myself are not very good at doing a budget.

Now they mention that if you do a budget you will seem to have gotten a raise.  How could that happen?  Well it appears that as you preallocate your money you gain more control over said money.
You learn or set limits on what you want or are willing to spend your money on.  Then if you do the all cash purchase system you find you really do have more control of your money.

Budgeting works best with cash or check and not credit cards.  Why?  The tendency with a credit card is to purchase and forget about it.  You don't see the money leave your hand so you don't feel the potential pain right away.  So if you have $60 for food allocated that week and your working with cash you can't really buy $65 in food... you won't have the money at the check out.  Might now be the same if your using a credit card.  Now the Debit card acts like a credit card but, the money comes straight out of your account.  You can't go over unless you have overdraft protection.  Risk here is how that is handled.  A person here at works said she kept getting hit with a fee if she tried using her debit card with nothing in the account.  I would have run from that bank in a heart beat.  I had a bank charging a fee for not having enough movement on the account.  I was well above any typical minimum of $200-$500.  Got hit with the fee one to many times and then moved my money to a credit union.  Good old banks for you.


So what goes into a budget?  It is not simply tracking what you spend.  That is a start since you can see what you spend the most money on.  But, a budget is really much more then figuring out what you are spending your money on.
A budget is really telling your money where you want it to go.  A budget is figuring out your needs, want, and how much you have.  Then you decide where your money needs to go, how much you have left over and how much you can use now, how much you can save for a bigger purchase in the future etc.  Ultimately, if you plan right you will not over spend and can plan to pay cash for things.  You'll get stuck with little or no interest and that lack of interest coming out of your pocket will be the ultimate wealth builder.

So let us work on a sample budget.  The best idea is a zero sum budget.  That means that everything is allocated .... even savings or payments as savings for things like a car.

OK so let's get somethings down here and do a sample.  I'm going to keep things simple with this monthly budget.

Monthly Budget
Income	+$3,000
Rent	-$1300
Food	-$550
Utilities	-$150
Entertainment	-$75
Gas / Auto	-$150
Savings	-$675
Misc	-$100
Total Unallocated	0

As you see there is a specific line item for savings.  That can be actual money set aside for an emergency fund or you can line item it as if it was a car payment.   Then as you have built things up you can go and pay cash for the vehicle instead of financing.  Think of the savings over time.  Think of 4 years of payments at 5% interest.   Per bankrate.com and their calculator if the car is 15,000 you will have paid about $1,580 in interest.   That works out to be about $33 on your ~$345 monthly payment.  The idea here is that if you pay cash you can put more money back in your pocket.  It also requires that you make a wise choice on how much to spend on a vehicle.  Doubling the amount of the car to 30k gets you a double payment.  Thus ~3k in interest.  So the more you can pay up front the more you have in your pocket.  Think of the ability to pay cash for your car, and then save up what would be a car payment.  You have the car paid for in full by the time you need a new.  That is if you stay practical on how much you can afford.  Avoiding getting too much car and this principle works wonderfully.  check out the calculator here.

In a previous post I talked about a sink fund.
Pay Yourself First - some thoughts on personal finance
It's the same idea.  You pay yourself the amount you'd end up putting on your credit card.  Then you go and pay cash for the item.  Saving 15%-23% in interest.  You might think a few bucks in interest on a low cost item is nothing.  How about when you do that a few too many times?  The interest can start adding up.  I'm doing it currently for a Blu-ray player.  I'm putting aside $5 a week.  I'll have enough by the time Christmas comes around.  I'll also be able to take advantage of specials etc.


The bottom line is if you can tell your money where you want it to go you can come out ahead.  You'll actually appear to have more money because you stick to a budget and your defined limits.

So what are some of the recommended limits or percentages for a budget.
I found a reasonable chart from the Michigan credit counseling association
http://www.michigancounselingassociation.com/uploads/2/6/3/4/2634297/budget__financial_education.pdf
There definately is no hard can fast rule on all numbers.  For example housing is labeled as between 25-35%.  Food goes from 5-15%.  See a large variation in the values.  If one area is higher (housing is really expensive in California compared to Iowa) you then have to reduce another.  But, don't be such a nickle and dimer that you don't have any fun in the middle of everything.  You'll just have to find cheaper methods if you have a lot of debt your trying to get out of.   We use the library weekly for movies and more.  Pay only a few fines here and there...... saves on having Netflix, or cable.  Allows us to put that money to other categories.





I'd like to hear some of your budgeting ideas.  Things that work, things that have not, any ideas you have used to stay out of debt.
So the best thing I can say is get to work... and just do it.

Additional resources:
One for the Money
One for the Money - Low cost booklet on Finances
Dave Ramsey Budgeting forms
How to Budget - 50/20/30 Principle


Buaidh - NO - Bas

Pay Yourself First - some thoughts on personal finance

I'm getting towards the end of the book by Dave Ramsey entitled "Financial Peace Revisited".

In this he brings up the concept of "paying yourself" first.   The idea that you need to make sure you set aside something on a regular basis for yourself.  You have your regular bills and the like but, if you don't do something for you as a line item you will never get ahead.




The basic idea here is that if you can pay for things in cash and not credit (with the associated 10%+ interest rate) you come out ahead.  And how do you get to the point you can pay for things with CASH?
First you have to control you spending and have the patience to hold off on bigger purchases and  look for bargains and the like.  By saving up the money for the purchase over a few weeks or months you develop the ability to look for a bargain and have most if not all the money to pay up front.  That way you save all the interest charges.

So what does this have to do with "paying yourself" first?   If you develop in a budget a line item where you set something aside it's like your paying yourself.  You have become like the electric or gas bill.  You might not be able to do much in the short term if you are saddled with a lot of credit card debt.
By moving to a system where you pay with cash where possible (might not make sense on some larger purchases), you save so much in interest in the long run.

The basic idea is if you can wait say 8 weeks and save the money needed to purchase the $200 item instead of buy on credit you will save a lot of money in the long haul.  The difference can be $20-$30 over the 8 weeks.  If you finance your purchase and let's assume you don't pay it all off at the end of the month so you have a portion accruing interest @ 18% (a relatively common average).
so let's take that $200 purchase and only make a minimum payment of say $50 to keep things simple, the next month you have $150 to payoff and the 18% interest begins.  That works to about $14 in interest over several months if you just make minimum payments of say $15 each month.  It would be less for a minimum of say $40 or $50 getting it down to say $5 or $6 in interest.

Now for an amount like this you say $15 is not all that much.  If you are putting just about everything on the card the interest begins to build as you can afford to only make the minimum payment.
Remember the unfortunate part is that the interest you pay is on the interest as well....... bad in the long haul..... avoid it if at all possible.  I repeat avoid it at all possible.



Check out the chart below that navigates when it is good to use cash verses credit.  Per people like Dave Ramsey you should be cutting up your credit cards and going cash.  If you pay yourself first you won't need to use credit.....  most of the time.

Cash vs. Credit Info-Graphic Chart

http://www.businessinsider.com/credit-debit-or-cash-2014-9

Now if you plan ahead and have some emergency funds you'll be able to go towards cash only payments.  Pros and Cons of carrying cash - Dave Ramsey


There  is peace and security when you can do you payments in cash.  You will spend less, have more control over things and pay a heck of a lot less in interest.  Have you heard of the deals where they give you 90 days or 6 months same as cash?   They are banking on the fact you will not pay off the amount in the 90 days or 6 months.  The interest from day one then is piled on.
Recently had to have a bunch of dental work done.  Well over $1,000 in all.  Well they are offering 18 months same as cash.  So I have till October 2016 to pay off the amount.   Now on the bill they have a minimum payment of ~$43.  Factoring that out over the 18 months it comes to only $775.  See the deception?  Pay only the minimum and you come up far short.  So the new amount at the end of the 18 months includes the interest accrued from the beginning.  Hundreds of dollars just got added on to your total.  All at once since they don't have to have a minimum that will actually get you to the end of the promotional period with the total paid off.  Sly and tricky huh?

You can figure out interest payment by going to the following site by Bankrate.com
Interest payments - credit cards - BankRate.com

Bottom line I have to be careful and not get sucked into paying only the minimum.  So instead of the $43  I need to be paying the $73 to cover everything.

If you mess around with the numbers on the Bankrate page you can tell how much interest you will be paying over time.  It's not pretty really.  That is why you have to get into the habit of paying cash, controlling your spending, being patient, and "Paying yourself" such that you can take advantage of special deals, keep from paying interest, and have some funds in reserve.........

I got turned on to a system recently that is called a "Sink Fund".  It is kind of like paying for the item in question ahead of time and thus avoiding interest.  That said you might think that seems like something dumb on small purchases.  Make no sense to save up to buy that Foreman Grill on sale at Kohl's department store.  Maybe but, only if you have move set aside already.  Sink funds are for items you kind of want down the road and can plan for.  It might be the new dining room set, or the Blu-Ray player, Laptop, or Car.  You figure a rough amount you need to save and then figure out when you need said item.  That helps to figure your amount per week or month to save.

I for example want to have a new Blu-Ray player for Christmas.  I have about 30 weeks to go till then.  So if a typical Blu-Ray player is $120 dollars I'll need to save about $5 per week to meet my goal.  That is assuming I'll be buying it just at Christmas and not after or during the Black Friday frenzy.  Any way I will have to wait a little longer, but, with my current financial situation I save a ton in interest.  I'll also be able to search out bargains, and other deals till then.
We did something similar about a year ago with our TV purchase.  We did a lot of hunting, comparing and deciding.  Finally, the deal that worked the best was just after the new year at Walmart.  We though oh the deals around Black Friday will be good.  All off brands, or something way out of our price range.   These are simple habits, that help you to "pay yourself" first.




Consider a sink fund, or automatic saving account deposits.  I have some going to one of the "Online Banks" every month.  It automatically, and it is forcing me to save some money.  I hardly see or think of the amount since it is not so readily accessible.
You can do the same on your pay check.  Have some of the money be deposited in your savings verses your checking, heck you can have multiple accounts.  And how about your 401(k).
You should be having at least to the company match taken out.  That includes free money, and with time and average earning of say 4-12% you will be surprised how much you can grow the account to by the time you retire.  Even the few bucks 4% might constitute will create a large nest egg over 30-40 years.  That is "paying yourself"  so you are not eating Alpo in retirement.

 

Bottom line, if you want to get ahead you have to include yourself a your pay check allocations. Otherwise, you won't get anywhere and might just end up Bankrupt if your not careful.

Buiadh - NO - Bas