If only reality checks were the same as cashier’s checks, we’d all be rich! Well, creating a budget can be quite a reality check. This is one reality check you can actually cash in on!
Most people create a budget so that they can either get out of debt or save more money. The truth is there are only two ways to accomplish either of these: spend less and make more.
You may not be able to make more money in your current situation, and you might not be able to spend much less than you’re currently spending. Creating a realistic budget helps you see where you’re spending your money, and where there’s room to save.
Piggy Bank © by Carly Jane1
Most of us realize that there are two types of expenses: fixed and discretionary. Fixed expenses like insurance and mortgages are usually a large part of our budgets. But, you might be surprised at how much you’re spending on discretionary expenses.
If you keep all your receipts, you bank online, or you pay for everything with credit cards (that you pay off each month), you might have a pretty good hold on where your money is going. But, even with these tools there’s probably a lot you’re spending on that you don’t even realize.
Logging Discretionary Purchases
Logging discretionary purchases is the first step in creating a realistic budget. For a budget to be realistic, you have to be a diligent accountant.
It’s really not realistic to create a budget without taking all the small purchases into account. It’s great to have an idea of what you’d like to spend on purchases, but it’s even better to know what you’re actually spending.
Several years back, my husband and I decided to keep a spending log for a month, even though we thought we had a pretty good idea of what we were spending our money on.
What an eye opener when you log every, and I mean EVERY, purchase: a bottle of water $1, a quick stop for gas $15, a cup of coffee $2, stamps $8, a greeting card $4. The cost of a day of errands really adds up. There were lots of little things on our spending logs that we never gave a second thought to; really too many to list!
Why did we keep the spending logs? We weren’t interested in cutting out gas, coffee, or stamps; we were planning a family budget.
Planning a Budget
Once you have an accurate list of both your discretionary and fixed expenses, you can go to work on creating a budget.
A budget manages the difference between your expenses and your income. Your income should be more that your expenses or you’ll have a deficit. Ideally, you’ll have more income than expenses and that extra income is managed in some form of savings or investing.
Balancing Your Budget and Reducing Expenses
If after logging all your expenses and your income, you have a deficit, you must reduce your expenses or you WILL go into debt.
Almost everyone understands (though we don’t all live by it) discretionary expenses can be managed. You don’t have to go out to eat, hire a housekeeper, or have your car washed. You can cook, clean your house, and wash your own car to cut costs.
But a large part of our expenses are in the fixed category; a category that is often overlooked when creating a budget. The fixed category may be car payments, rent or mortgage, credit card debt, etc.
I was speaking recently to a friend who owns several rental properties. One of his tenants was months behind on his rent. When the tenant said to the landlord, “I don’t have enough money to pay my rent,” the landlord baulked.
You see, my friend the landlord explained to me that the tenant owns two cars, a motorcycle and a leisure boat. He said, “I’d feel sorry for him but I just can’t. He can’t pay his rent, yet he has a driveway full of toys?”
If you have payments of “toys” and you’re living in debt, it’s time for a reality check. Get rid of these burdens and then you can create a realistic budget that doesn’t include unnecessary fixed expenses.
Let’s say that’s not the case; you simply have “real” fixed expenses that you’d like to reduce. Look for creative ways to reduce those expenses. And consider expenses you might regard as fixed that are really discretionary: cable, coffee out, eating out, an additional phone line.
Mortgage too high? If you would like to pay less for your house:
- Contact the city to have your taxes reduced. If homes are selling for less in your area than when the city appraised your home last, this simple act can save you thousands.
- You can refinance. This only works if you plan to stay in your home long enough to make the cost of refinance pay off – consult a finance adviser.
- Sell and move to a less expensive home, or rent. This may sound drastic, but it is an option.
Car or home insurance too much? Call your broker and ask to have it reduced before you shop around. You may be surprised to find out that if you simply ask, some insurers will rework your plan to better suit your needs. Your insurance broker may also suggest things you can do to reduce your insurance such as having a security system installed or taking a driving course.
Credit card debt too high? Make your payments on time, without exception. Call after six months of timely payments and ask for a reduced credit card rate.
What do you think about these budgeting tips?
|
 |
