PERSONAL FINANCIAL MANAGEMENT: TOP 5 Questions--#2: Establishing and Managing your Budget

The second question (of the TOP 5) from my recent lecture at Wheaton College that I will discuss is:

Question #2: How do we establish our budget and determine how much to spend and how much to save?

This is another great question, especially when it is so important to get off to a good start and by establishing a budget you increase your chances of long-term financial success.

First I will address budgeting in general and MY recommendations, secondly for those of us who are older than college students I will provide a list of 10 easy ways to reduce everyday expenses (published by Fifth Third Bank on 1/27/10 in the Sun-Times Media).

Lets get started.

Everyone MUST sit down and write down a detailed budget identifying their income and their expenses for each month. If you don't write it down it will be hard to track and if you don't track you will not achieve success..its that simple.

Start with your TAKE-HOME PAY. Why? Because this is what you control each month.

From your take-home pay, move 70% of it into your "Lifestyle fund" and 30% into your savings/charity fund. This article will not discuss the 30%, I will save that for later. So back to the 70%, this is what I recommend as the money you can afford to spend on your lifestyle. This means all expenses must NOT exceed 70% of your take home pay otherwise you risk accomplishing your long-term financial goals.

Completing your budget. Place 70% of your take-home pay on the top line and then begin to categorize your expenses and known (or projected) amounts. For some expenses you know the payment ie. mortgage/rent, loan payments, cell phone, cable, etc. For other items such as utilities, food, clothes you need to project or BUDGET for those expenses. This is why tracking is so important. By tracking your expenses in the "projected" accounts you will be able to STAY within your BUDGET. The first few months may be a game of adjusting, but by the 4th month you should have a good idea of your expenses and you will be able to adjust accordingly to keep your lifestyle expenses to no more than 70% of your take-home pay.

Now I realize I'm making this sound easy, and if it was everyone would be successful..but we know that is not the case. So why do people fail? I propose the following reasons:

1. They never sit down and develop a budget in the first place
2. They don't track their spending to make sure they don't over spend
3. They cheat one month and plan to make it up the next, which doesn't happen
4. They are undisciplined, lazy or don't see the long-term value of doing such a tedious task
5. They don't care about their financial success.

Now, I know some of these comments might sound a little harsh, but I'm not here to cudle you, I'm hoping to MOTIVATE you to achieve financial success.

Next problem I've seen over the 20+ years of being in the Personal Financial Management business, people want a 'BETTER' lifestyle than the 70% affords. Well, to these people I've simply said, GREAT! You have a couple of choices, (1) make more money, (2) reprioritize your expenses (such as eat out less to afford more vacations, or whatever the case, (3) live outside your means and never achieve financial independence.....its up to you.

Okay, I'm done preaching...but to my soon to be new college graduates...take heed to my advice and over 20 years of experience.....live within your means--70% MAX for lifestyle, write out your budget, track your budget and stay disciplined...if you do these simply things you WILL BE ON YOUR WAY TO ACHIEVING FINANCIAL SUCCESS.

Now, for those of us who are older than college students and may need to cut some expenses to get within our 70% of take-home pay so that we can save 20-30% for our future spending. The following list identifies 10 ways to reduce your everyday expenses:

1. Check with your utility and other service providers. Many energy, telephone, cable or other providers are proactively helping customers save. Some offer savings tips online, discounts for energy-saving items and by "bundling" services you may be able to reduce your total cost for cable, telephone and internet.

2. Save on heating and cooling while you're away. Program your thermostat to adust lower/higher when you are at work or on vacation. Change air filters to keep operating costs low and keep vents free from items such as draperies, furniture or rugs that may block airflow.

3. Wash full loads only. Conserve water by only running the dishwasher when its full. The same goes for laundry. If possible, adjust washer's water level to the size of the each load.

4. Grocery shop alone and on a full stomach. We have all heard of this one and the reasons are obvious--and if you are like my wife--do not send your husband to grocery shop--unless he is more aware of value shoppoing than I am.

5. Plan meals and make a list. A list makes it easier to stick to when shopping. Also, look for sales and coupons prior to shopping.

6. Review your insurance. Auto, home and health insurance coverage needs change over time and depending on your life stage it may make sense to adjust deductibles or coverage levels which can lead to savings.

7. Only pay for what you use. Do you really use all of those cell phone minutes or watch 900+ TV channels? How about the magazines your receive but never get a chance to read. It may make sense to switch to a more basic cell phone or TV cable plan and cancel magazine subscribions.

8. Consider public transportation. Depending on where you live- the bus, train or other mass-transit option can help save on gas and parking expenses. Additionally, the ride may be less stressful.

9. Take your lunch to work. Add up how much money you spend eating lunch out over a month and you will see the light!

10. Change your way of thinking. Be optimistic and make saving money a "fun" thing and not a "giving up stuff" thing. Challenge yourself and give yourself (and family)rewards when you accomplish milestones.

Wishing you Great Financial Succe$$,

BILL