Money is a great tool. Properly managed, it can enhance your quality life, give your children a great start, and help your friends, family and favorite charities do good in the world. Mismanaged, it can become a source of stress and conflict, harassing phone calls from lenders and garnisheed wages.
One of the keys to getting a handle on your finances is to prepare a manageable budget, and use it to help keep you from living beyond your means. It may help to think of your budget as a spending plan instead — it shouldn’t be about deprivation. A good budget flexes with changes in your circumstances, and lets you predict how much you’ll need each week, month and year to meet your obligations and build a financially viable future.
It doesn’t matter whether you use a fancy spreadsheet or a piece of paper, just get started. First, write down your income, and remember every source, including interest and dividends, government assistance, even birthday money from Mom and Dad.
Then make a list of all your fixed and variable expenses on a monthly basis. Fixed expenses are those that don’t vary, such as mortgage payments, child support and car insurance.
When you’re writing down variable expenses (those that fluctuate from week to week or month to month) don’t forget the small stuff, like trips to the drive-through and bank charges, and the stuff you’d really rather ignore — like $158 a month in interest charges on your line of credit!
If don’t know what you spend, keep track for a couple of weeks. Finding out what you actually spend on groceries, clothes, visits to the salon and meals out can be a real eye-opener.
Also include in your plans at least some small savings, aiming for at least 5% of your income. If you can’t save that much now, put in some tiny amount anyone can scrape up, like $25/month
Remember that all your annual expenses need to be accounted for in your monthly budget. If you blow $500 on gifts at Christmas, put down $50 in your monthly budget. Remember debt repayment too, and always aim for more than minimum payments.
Once you have a clear picture of your spending and your income, it’s a simple game of pluses and minuses. If you’re spending more than you make, you have two options: make more or spend less. Preferably both. Just don’t live in denial. Be prepared to cut back on variable expenses and give up some luxuries. Whatever it takes, your budget needs to balance. Getting further and further into debt each month is no longer an option. If you have to give up eating out, colour your hair yourself, or live without a vacation this year, it’s a small price to pay for lasting solvency. Most importantly, when there isn’t money to spend, stop spending.
To stay on track, stop looking at your budget as a static tool. It’s like being on a diet: if you tell yourself you can never have ice cream again, you’ll eventually lose your resolve and eat seven pounds of ice cream in a day. If you are desperate to have a weekend away, adjust your spending for the few weeks prior; brown-bag your lunch, take the bus, do whatever you have to pay cash for your getaway. If you overspend one week, cut back the next.
Finally, get real with yourself. Distinguish needs from wants. You need food and shelter. You want a cell phone, magazine subscriptions and satellite television.
Once you get the hang of it, being in control of your finances offers a much greater feeling of accomplishment than stopping at the drive-through ever could.