Saturday, January 28, 2012

New Year's Resolution - Better Budgeting

Happy New Year!  I hope this year brings you much joy, peace and happiness!

I also know many of you are putting together your New Year's Resolutions or perhaps you already have.  Now that the holidays are behind us, many folks will be trying to figure out how to pay for all those gifts they bought so I thought I'd add some more information about budgeting.  

In my first budgeting post I talked about how to develop a budget and use it to determine your Discretionary Spending to maximize the money you have and avoid over spending and going into debt.  The budget developed was on a monthly basis and helped you develop a number for your entire month's "allowance."  For a lot of folks, this can still create some problems for a very simple reason and it has to do with the way our brains are "wired."

As it turns out, some people think better in smaller increments either week to week or day to day.  There nothing wrong with that as I've often said we each have a method that works best for us.  For some it's using credit cards and paying off the balance each month.  For others it's using cash.  What ever you method, you have to figure out a way to "keep score" and track your spending and budgeting in smaller increments is one way to do that.

Once good example of breaking down a budget into smaller chunks is thinking about how you buy groceries.  We all have to go to the grocery store.  How often do you go?  Each week?  Once a month?  Some combination of the two?  Let's talk for a minute about someone who goes once a month.  If they buy everything they need for the month at one time, how big is the grocery bill?  How much extra storage space would they need at home?  Maybe they would even need more than one refrigerator?  All that space for extra groceries and buying the extra refrigerator and the additional power it consumes costs more money.  Also, some stuff may spoil before you're able to use it which wastes the money you spent on those items plus costs more to replace them.

Now how does that compare to going once a week?  If you get what you need for just one week at a time, you spend less money at the store and you don't need a whole lot of space for all the "extra" stuff.  You are more conscious of exactly how much you are eating week to week and can more easily identify the "essentials" you really need.  If you plan your meals for the week, it becomes even easier to figure out exactly what the essentials are for you and you are less likely to buy something on a whim thinking you will need it "sometime" during the month.  Finally, there is less chance that the things you bought will spoil before you use them.

When I lived alone one thing I used was a standard grocery list.  I would list all the items I normally purchased in various categories on a sheet of paper.  For example, under cleaners I would have glass cleaner, toilet cleaner, dishwasher soap, laundry detergent, and etc.  I would keep 2 containers of each.  When I opened the "new" container of dishwasher soap, I would circle it on the list so I would know to get it the next time I went to the store.  This way I never ran out of anything I needed and only bought what I knew I had to have.

Sometimes there are specials on items in the store and that can save you some money.  If your dishwasher soap is on sale buy one get one free, it doesn't hurt to pick up one extra and save some money.  However, going to the warehouse store and buying a 50lb bag of dishwasher soap may be cheaper per pound but cost MORE CASH out of your pocket and not fit under the sink in the kitchen!  Do you get the idea?  Managing a budget is about making a plan and sticking to that plan so that you insure at the end of the month you have some money left over.

The only way you will be successful is to change your mindset.  You can do it; it just takes discipline and determination.  What I mean is if you have $200 budgeted for food then that's ALL YOU HAVE.  Break it down into weekly (divide by 4 or $50 a week) or daily chunks (divide by 30 or  ~$6.50 a day) if that's what YOU need to do to manage it.

Another example I use often is going out to eat for lunch.  If lunch cost you $5 a day, you'll spend $100 a month just for lunch!  Wouldn't it make more sense to "treat" yourself to one or two lunches out a month and and save that $90 for groceries?  You will get a lot more food at the grocery store for $90 than you will at a restaurant.

Once again the point of a budget is to make choices that are not for the short term or for what you want "right now" but for your long term financial health.  If you need to put $50 cash in your pocket at the beginning of each week for four weeks to make sure you don't spend more than your $200 during the month, then that's what you need to do.  If you have to place a certain amount of cash in your "secret hiding place" at home for things you may "want" during the month and only put that money in your pocket when you're ready to purchase them, then that's what you have to do.

Another thing to consider is your tax refund.  How will that affect your budget?  Do you plan to use it to pay down your holiday bills or will you spend it on that new "thing" you just have to have?  Which decision is best for your long term financial future?  Also, if you're getting a big refund that means you are giving the government an interest free loan.  Ever notice that, if you underpay your taxes, they charge you a penalty but if THEY owe YOU money, they don't pay an interest?

When you complete your 2010 tax return review it with this calculator and make any adjustments you need to your withholding so that you get more money in your pocket each month.  The biggest challenge for most is to have the discipline to save it rather than spend it.  Just pretend like you didn't get that money.  Set up for your bank to transfer that exact amount into a separate savings account each month so you don't "see" it.  In fact you might even be able to save all you need for the holidays this year and not have any holiday bills going into 2012! 

I'd love to hear about the methods you use to manage your budget so be sure to add some comments here or on the Facebook Page.  

Who knows, you may provide the "system" that someone has been struggling to develop for themselves that will make all the difference in their financial life.

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