Thursday, October 23, 2008

Budgeting 101

As I watch the news everyday, I am blown away by the economic situation our country is in right now. I found myself asking, "How did we get here?" I guess we can blame the mortgage giants, or Barney Frank, or the congress, or President Bush...but the truth is that the problem started with everyday Americans. Our country has lived beyond our means for decades. Had we not bought homes that were too expensive, purchased cars that we couldn't afford, and charged oodles of things to credit cards that we didn't have the money to pay for, this situation would not be happening.

This post is depressing, I know. But, I believe that it is something we need to talk about. We can't change the bad decisions that have been made in the past...but we CAN change the decisions we make in the future. We need to start living within our means...starting TODAY. The first step to living within our means, I believe, is to make a budget. I know, I hear the word "budget" and tune me out. Who wants to live with restrictions like that? Well...ME for one. I actually LOVE budgeting. Crazy, I know. I absolutely adore it! I was lucky enough to take a "Family Finance" course while at BYU. It seriously changed my life! If I were to go back and choose a different career, I think I would have become a financial advisor. Figuring out money situations is almost a game for me. It's me versus the Benjamins...and I WILL win! (That's my competitive side coming out) I think EVERY family, whether you make 25K or 250K a year, needs to live within a budget! It really is the key to financial freedom & achieving the goals that you want for your family.

My husband & I used to teach the "Marriage & Family Relations" class in church up until a few months ago. One of the lessons is about managing family finances and is based around Elder Tanners's talk, "Constancy Amid Change". It's an awesome talk. If you want to read it, the link is here. Anyway, everytime I got done teaching this lesson, I would have at least 2 or 3 couples come up to me & ask me to teach them how to budget. I was amazed at how many people did not have a budget and had no clue how to even start setting one up. Because of this, I made up a simple step-by-step form (based on the college course I took) of how to set up a budget. Considering the situation our country is in right now, I thought I would share it with all of you. Here you go...

Steps to Creating a Successful Budget

Step 1:
Make a goal. Something you want that you don’t have now (i.e. more savings, family vacation, build up your food storage, finish your basement, get out of debt, etc.) This is probably the most important step. If you have a goal that both partners want & are willing to work toward, living within a budget becomes easy & almost kind of fun.

Step 2:
Track your expenses for at least two weeks. Write down EVERYTHING (even if it’s just 50 cents in the pop machine). You'll be surprised by how much money you waste on things you really don't need.

Step 3:
Decide what you can live without. At the end of two weeks, sit down and look at the money you’ve spent. Go through the list of expenditures and decide what can go. Can you pack a lunch to take to work instead of eating out? Can you go without that soft drink everyday? Can you eat out a little less than you are now? Do you really need that pair of new shoes every month? Do your children really need to be dressed in Baby Gap clothes every day of their life? Etc.

Step 4:
Divide your expenses into three groups: bills, needs, wants

Tithing (Yes, this is a bill...the first one you pay)
Fast Offerings (This too)
Car Payment
Car Insurance
Needs (These are things your family CAN NOT live without...nothing more)
Home Improvements
Misc. Stuff

Step 5:
Add up the amount of money you spend on all bills & needs (not wants) each month. Then figure out how much money you bring home after taxes each month. Do you bring home more or less than you spend on bills/needs each month? If you bring home more than you spend, you’re in good shape. If you’re bringing home less, figure out what can go or what you can get for cheaper. Example: Can you sell your car and get one with a lower monthly payment? Can you get other quotes on insurance to see if there is another company that is cheaper? Do you really need a cell phone or can you live without? Can you live with fewer TV channels in order to get a cheaper monthly rate? Do you need to sell your house for something smaller and less expensive? (These things are good to ask yourself even if you still have money left after paying bills/needs. Every dollar you save here is a dollar you can put toward a goal you want to achieve.)

Step 6:
If you have money left over after paying all bills/needs, then you can move on to your wants. You should rank your wants by importance. For example, savings should probably be more important than going on vacation. Give each want a $$ value. For example, a family finds that they have $500 left over each month after paying all bills/needs. By tracking their expenses, they figure out that most that money is going to eating out ($125 a month), miscellaneous expenses ($75) & hobbies ($300). However, they would like to save more money for an emergency savings fund, start saving for retirement & save money for a family vacation in a few years. They decide to put $100 a month in their emergency savings fund, $200 a month in a company 401K, & $50 a month in a vacation fund. To compensate, they decide to only spend $50 a month on eating out (rather than the $125 they were spending before), $50 on miscellaneous expenses (instead of $75), & only $50 a month on their hobbies (a BIG sacrifice from the $300 they were spending before. But, they decide that sacrifice is worthwhile because they would rather be able to build up their savings & eventually go on a vacation). This is just an example that came out of one of my text books, it in no way tells you how YOU should allocate your money.

Step 7:
Write your budget down and then continue to keep track of your expenses. Example: Every time you go out to dinner, write it down. Once you hit your limit, discipline yourself and don’t eat out for the rest of the month.

Step 8:
Sit back and enjoy the reward of watching your money go further than you thought it could ever go…and achieving the goal you made in Step 1!

There you go...8 simple steps. Take them or leave them, but I know that they have helped my family to track our money & make sure it's going to things that are important to us.

Ironically, our church leaders warned us during both General Conferences in 2005 that this situation would be coming & that we needed to get our homes & finances in order. (Get out your old Ensigns and read through will shock you how much it was talked about). Hopefully, if we didn't listen to them then, we will listen to them now. Living within our means is the key to financial freedom & temporal preparedness. If every family in America started living within their means TODAY, we could prevent a financial crisis like this from happening again.

(Sorry this was such a depressing post, I promise something a little more upbeat next time!) :)


Andrea said...

I actually really enjoyed it, and didn't find it depressing at all. My husband and I are trying to figure at the budget at the present moment. It is so hard. It is so hard for me to keep track of where the extra should come from, like I owed $5 a piece for each of my kids field trips, and then we were invited to go to a pumpkin patch. That cost us $8 more dollars. What do you do with that? I am up for any advice. It is the extra surprises that kill us. We are certainly budget oriented, but it always turns out badly in the end.

Lindsay & Mike said...

I actually have misc. expenses planned into my budget for those little things you don't expect. For my family, I have found that we need about $100 a month for misc. surprises. Whenever something like field trips, sports fees, etc. comes up, I take it from my misc. budget. Does that help?

Becky and Jaron Brunson Family said...

Not a depressing post at all, very informative, actually. Thanks for spelling it out for us! Our bishop challenged us to spend only cash for the month of October for everything possible (i.e. not including rent/mortgage or bills). He said we'd be surprised at how much we saved! My husband has heard of freezing your credit cards in a large block of ice in your freezer. That way, they're certainly not easily accessible - you'll have to stew over your purchase for a few days before you can flash that plastic! (But, it's still there in an emergency.)

Becky said...

Nicely spelled out. One little comment that you talked about, but that we have found helpful: Do the finances together as a couple. That doesn't mean you both have to sit there every time you enter a receipt, but if you both know where the money is going and are making the decisions together, there is so much more peace in your marriage.

Becca said...

I think this post is great! My husband and I sat down together and made a budget when we were first married, then out of stubbornness we dropped a LOT of categories to $0 so we could save more for a house. Once we had the house all of our bills changed, and we had to modify most of the categories. Then we had a baby, and everything had to be changed again. Ironically I ran into our modified budget yesterday and thought, wow we should be filling these things in. (Its been a few months and I have no idea how much we are spending on some things) so this post was a great reminder. Even though we have no immediate needs and have money left over at the end of the month, we could actually be saving for something we want.

Vanderbeeks Images said...

Thank you for the post. As I looked through it I realized that we are doing a lot of things right. We might eat out once a month - and it's usually at someone else's expense. (Thank you insurance reps) We don't have cable or dish tv at all. I have a meal plan and buy groceries once a month (except for milk every two weeks). We have our retirement accounts but we don't have any regular savings - except for the children. ($10/month) etc, etc - but where we struggle is the $15,000 to $20,000 in medical bills per year for the past 4 years (and yes, we even have insurance). Between surgeries, cancer treatment, and tests - so it's really do or die sort of stuff. I just don't know what to do anymore. That large of an expense over and over again is really hard to plan for, although next year should be better (I drop to fewer check ups and T is so much better since he got his tonsils out). Anyone got any suggestions? (I work from home and make more than I could anywhere in the valley - although medical benefits would be nice, but it's kind of too late).

Krysta said...

I loved this post! We have been getting more prepared in this area a lot lately. I definatley agree that having a budget gives you more freedom! You are so much more in control of your money when credit cards are thrown out the window!

Lindsay & Mike said...

For Laura,

Situations like yours are difficult. I think that, in situations like yours, you just have to do the best that you can. That's all the Lord requires of you & that's all you should require of yourself. As long as you're not spending your money frivolously (which it sounds like you're definately not) & you're trying to pay the medical bills off over time...then I think you're in the right direction.

Emily said...

Loved this post Lindsay! You have great advice! I used to have a physical reaction to the word "budget" so we use another word around our house. We call it our SPENDING PLAN. I feel so much better about that word. When my husband and I were newlyweds, I heard a statement about budgeting that has never left me:

Millionaires live on a budget. Their budgets are just bigger.

Budget is a good word, but SPENDING PLAN is a much better word! :)

Thanks for all the great advice!

Michelle said...

Neat post! I always love learning more about handling finances.
One question: do you track your spending on paper? Or is there a particular software program you prefer?
Very timely for this information. Everyone's trying to cut back, I think!

Kristin and Dan said...

You should have included a picture of your insane budget notebook, one page for each thing you budget for, that you have. (if you still have it...which i'm sure you do) You are one budget-happy girl!
Good post, stuage!

Lindsay & Mike said...

Much to my husband's dismay, I still use a paper system. He has created an excel sheet for me, but I can't figure it out! (Can you say computer illiterate?) :) Someday I'll make my way into the 21st century!

Gayla said...

This is great and very timely. Thanks Lindsay!