Monday, January 7, 2008

OK, so what type of budget should I have?

That is a common question I get - what type of budget should I have? That always reminds me of a joke I heard along time ago (and the answer is surprising similar). A parishoner was asking her pastor if it was ok for women to wear make-up. The pastor replied, "I don't know, dear, how bad is your face? If your face needs it...DAB IT ON!!" Same is true with a budget...everyone's situation is different, so the budget needs to be tailored to that specific situation.

If you are like most people though, there are some basic elements you need in the budget. These are things like mortgage or rent, food, vehicle expenses (car payment/gas), clothes, loans/credit cards, and utilities. After that, pretty much everything else is unique to each person or family.

Two non-negotiables before we did anything else, no matter how hard it was financially that month, was we tithed and saved...we paid God first, ourselves second, and everyone else last. I'm not here to preach to you, but something happens when you give...whether through a church (or other religious organization), or some other charity of your choice, if you give, you WILL get back. I can not explain it, but it happens. By paying ourselves, we made sure we saved something every month, in our emergency fund.

After the first two thing, my wife and I started with the biggies...Food, housing, car, debt. We further broke them down into smaller subcategories. Food included groceries and dining out. Groceries included stuff like food (duh!), but other items you would normally find at the grocery store...paper towels, toiletries, plastic garbage bags, pet food, laundry detergent, etc. We became very good at pre-planning our weekly meals based on what was on sale that week. By having a plan before going to the store, we knew what we were spending, instead of just walking up and down the aisles, choosing stuff as we went along (try it, you'll be surprised how much extra you spend on stuff, when you just wing it).

Housing we broke down into our mortgage payment, our property taxes, utilities and home owners insurance. We also added a little extra to set aside for home repairs and maintenance (like when the lawn mower breaks down). We kept the thermostat a little lower in the winter, and a little higher in the summer. We got a very basic local phone plan, for about $20 a month, with no long distance. We have a great cell phone plan with unlimited anytime minutes, and no roaming charges and free long distance, so we used that for our long distance calls. That helped keep our cost down, as both the cell phone and land line are only costing us about $50 a month combined. We looked back over out electric and water bills, figured out the previous years average, and set that as our monthly budget for each item.

The car category covered our car payment, car insurance, and fuel costs. We were a little tight income wise, so we opted not to have a car repair fund, and relied on our emergency fund for the time being). The big challenge was fuel, primarily because of the fluctuating prices in gas. We started putting into practice some of the tips we previously outlined in this post. I remember one week, we ran out of cash, and just BARELY made it to the next payday on fumes. Lesson learned there...plan a little more cushion in the gas fund...if you have left overs, add it to the next month (normally, if you over budgeted, I would say, reduce the amount budgeted, and put that extra money to work somewhere else, but with gas prices the way they are, I recommend keeping it and carrying it over to the next month, if it is under $10 extra).

Debt is the big hang-up, where most people get off track. First, it took a while to get in debt, it will take some time to get out. Do NOT be discouraged. Second, this requires an attitude change. I am not in anyway shape or form telling you to NOT honor your debts and pay them off. You made a contractual agreement to pay them, you have that moral, legal and ethical obligation to pay them. Bankruptcy (other than for massive unexpected legal or medical bills) is in my opinion, stealing. If you are at the point you have to declare bankruptcy because of consumer debt, you are stealing. Your choices got you there, you need to make the right choices to get out (the right way). That said, we had to make a choice about our debts. We finally decided to pay our debtors last, with what we had left over, not first, leaving us with nothing left over (one month, we had $40 for food for the whole month). Now you have to pay the rent and the car loan, because you need to get to work, and you need a place to live. This meant taking the risk that we would damage our credit rating. Once we made that decision, we felt a tremendous weight off our shoulders. It might hurt us in the beginning, but we knew that eventually we would be better off, and have a stronger score in the long run.

If we had enough to meet all our minimum payments, we did that. If we had extra, we threw all of it on the smallest total balance we had, and paid that off as fast as possible (I'll cover that strategy in a future post). IF we didn't have enough to meet all the minimum payments, in the interest of being fair, we listed all our debts, figured out the percentage of each one compared to the total, and then figured out the total we had available to make a payment with. We then broke down the available money we had to make a payment, into the same percentages that each debt formed, of our total debt. That was what we sent in to the creditor that month. We would call them, or write a short note explaining what was happening with all our payments that month. Guess what? We never had a problem...most were actually happy to help (lowering percentage rates, lowering minimum payments, waiving late fees, etc), and glad they were getting something, instead of being the last one or two who got nothing that month. We only had to do this one or two times, if I recall correctly, and we made it through just fine. Our credit score only dropped a few points, and is now actually higher than before because of lower balance to credit limit ratios, and consistent monthly payments, without being late (we thought we were being fair by rotating which payment would be late each month, so we always had a huge late fee somewhere, every month). That was the hardest part, changing our attitude about our debt, and being willing to sacrifice our credit score if necessary. You can always build it back up, and do it with a stronger foundation, once you change your attitude, and get financially straight.

After those main areas, we didn't have any money left over each month, the first month or two, and we did make some major changes the first few months, as we learned what we could live on, and what our true spending needs (not wants) were. The picture soon started to come into focus, and we actually started making some headway
in cutting our debt down. We started to increase areas of spending (bigger food budget, entertainment, clothing, etc), but making sure we always put most of the extra money into savings and debt reduction. A quick example to hopefully motivate paying that extra money into our debts, not only did we free up those monthly payments, but I figured we saved approximately $1800 in interest payments, our first year. Think about that...$1800 that stayed in my wallet, not the creditors wallet. How long would you have to work to make an extra $1800 a year? See what I mean when I say SAVING MONEY is MAKING MONEY!!

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