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Step 3 – Balance Income and Expenses

As you think about what was spent in each of the categories and plan how much to spend now, ask these questions:

  1. Which expenses are essential to your family’s well-being?
  2. Which expenses have the highest priority?
  3. Which areas can be reduced to keep your family’s spending within its income?
  4. How much can be afforded in each category?

Subtract total monthly expenses from total monthly income. The result is the amount that is “extra” or must be “cut” from expenses. If cuts are necessary, adjust the amounts you plan to spend in each expense category.

   
Add up the revised expenses and compare the total to current income. You may discover you don’t have enough projected income to cover current fixed obligations, or to pay necessary living expenses. If this is the case, some difficult decisions must be made. What can be done if expenses are greater than income?

  • Increase income. What are the possibilities for part-time or temporary work to help supplement income. Can other family members seek employment?

  • Cut spending. You may be able to cut back on utilities, food, gasoline, clothing, recreation, contributions or gifts. USDA has low cost menus and other resources that help families reduce expenses (http://www.cnpp.usda.gov/USDAFoodCost-Home.htm).

  • Reduce your fixed expenses. If too much income is going to fixed expenses, such as housing or debt payments, there may not be enough money left to cover your other living expenses. This dilemma may make it necessary to refinance loans, move to lower-cost housing, or sell the property to reduce fixed expenses. 



  • Look at other assets. What savings, investments or property could be used or converted to cash to meet expenses?

What can be done if income is greater than expenses? Allocate the extra dollars to savings for future short-term and long-term goals (education, buying a home, retirement). 


 
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Step 2 – Your Monthly Expenses 

People frequently ask: What should our spending plan look like? How much should we spend for food, clothing, and transportation… and so on? Are we spending too much on housing?

Households are rarely alike – thus a “typical’’ spending plan will not apply to everyone. There can be no hard-and-fast rules for family spending, because individual needs, tastes and economic circumstances vary from family to family – even when they have identical income and the same number of family members. However, there are various sources of cost of living information that can be used as guidelines to compare how your family’s spending differs from the average spending pattern of others.

• Categories: If you have tracked your expenses, you know how much is spent monthly for family living expenses. If not, use records, such as canceled checks, bills, and credit card and other receipts to figure out how much is spent. List the amount for each category on the appropriate lines in Step 2 of the worksheet from Step 1.

– Housing: mortgage or rent payments, property taxes

– Utilities: electricity, gas, oil, phone, water, cable TV, Internet

– Household Operations and Maintenance: repairs, cleaning supplies, paper supplies, equipment, pets and supplies

– Food: groceries, eating out, school lunches, snacks

– Transportation: gas, car repairs, maintenance, parking, bus, taxi fares

– Medical Care: doctor, dentist, clinic, hospital, medicine, glasses

– Credit Payments: car payments, installment loans, credit cards, charge accounts (If you break out the credit payments into the appropriate family living expense category, you will have a more realistic idea of the actual costs for clothing, entertainment and eating out, for example).

– Insurance: health, life, property, car, disability, long-term care

– Clothing and Personal Care: new clothing purchases, laundry, dry cleaning, hair care, cosmetics, toiletries

– Education and Recreation: books, magazines, newspapers, lessons, tuition, hobbies, club dues, sports, entertainment, vacations

– Miscellaneous: child care, gifts, contributions, personal allowances, child support, alcohol, tobacco

– Savings: funds set aside for seasonal and occasional expenses, short-term and long-term goals (college fund, retirement).

Remember, not all expenses are monthly. Because some items, such as property taxes or insurance premiums, come once or twice a year, families often forget about them and do not have the money to pay for them when the bill arrives in the mail. Be sure to include your non-monthly expenses in the spending plan.


Monthly Spending Plan Worksheet
File Size: 275 kb
File Type: pdf
Download File

 
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I get asked regularly about budgeting.  What’s the best way to budget?  Do you like the “envelope” method?  What about that new website?  Does Dave Ramsey’s way work?  Why do I need to budget?  How do I budget if I don’t have a salary and my income fluctuates?  You get the picture.  Even the Boy Scouts of America reference and teach budgeting in the Personal Finance merit Badge.   Here are 3 reasons why budgeting is important.

Reason number one- You will never have enough!  Odds are, this is a reality.  The odds of winning the lottery are definitely not in our favor.  Terrell Owens and Burt Reynolds, not to mention Riyanna have foreclosed on homes.  Businesses go bankrupt all the time.  It’s a harsh reality of life on this spinning globe.  Most of us will never enjoy complete financial freedom.  The best way to make sure you have some dough when you knead it (ok, so the word play isn’t that funny, but I tried!) is to budget.  Don’t let my dose of reality limit your dreams, but be wise is your relationship so that you can control money, rather than money controlling you.

Reason number two- Budgeting allows you to track your money.  If you account for your money, you’ll automatically make better money choices.  Tracking your cashflow allows you to have a more realistic picture of the true cost of a purchase.  You’ll be able to really know when you have a good deal in front of you, and your advisor will be able to better advise you in all areas of the money game.

Reason number three- You’ll have a fighting chance at retirement.  In today’s mess of a world, retirement isn’t such a sure thing anymore.  With that reason to procrastinate, along with all the others we come up with on our own, retirement can very easily get pushed off or placed on the back burner.   Budgeting allows you to allocate dollars each month to your retirement accounts, giving you a much better chance of being able to realize a comfortable retirement.


 
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I graduated in finance from BYU’s Marriott School of Business Management.  One of the best, most useful courses I took down there is Provo was a personal finance course.  Some of the accounting courses didn’t stick until I worked at Zion’s Bank and had to relearn accounting basics.  Personal Finance, however, stuck well.

One of the best tools I found for managing household finances is a tool that investors use to analyze large corporations, banks use for deciding whether or not to lend to companies as well as individuals.  In face, you most likely filled out one of these when you obtained your home mortgage.   It’s called a balance sheet.

Let’s take a minute and pretend you are CFO of a corporation… oh wait, you are!  Your family.  Whether you’re a household of one or ten, you have to look at finances like you’re a CFO.  The best place to do this is through the balance sheet. 

The balance sheet is the tool used to determine your net worth.  In a nutshell, your personal balance sheet adds up the value of all the things you own; house, cars, gun collections, sports memorabilia, antique pianos, retirement and savings accounts, etc, and subtracts the debts or liabilities you have outstanding; you mortgage, car loans, credit cards, student loans, etc.  The difference between these two numbers is what we call your “Net Worth”.  The end goal in the money game is to have enough of a net worth at retirement to be able to retire and live comfortably.  If you do a really good job, you may even leave some assets for your beneficiaries to inherit. 

Now, a couple of examples may be useful here.  Let look at a home purchase first.  If you purchase a $250,000 home, but you have a mortgage of $200,000, you have a positive affect on your net worth of $50,000.  Once you pay off the mortgage, you’ll have a positive value of $250,000 towards your net worth.  If you buy a car for $15,000 and finance the whole purchase, chances are you’ll owe more on your car than you could sell it for, and thus, you have created a negative effect on your net worth.  Again, the end goal is to improve net worth enough so you can eventually retire.  Credit cards can be detrimental to net worth, as they usually have no real asset tied to the debt. 

In our free 52 week program, we offer a simple and easy to use worksheet to quickly determine your “Net Worth”, a snapshot of your personal finances.  We hope that it helps guide you in making wise financial decisions and gives you a better shot at the retirement you’re hoping to enjoy.


Personal Balance Sheet
File Size: 242 kb
File Type: pdf
Download File

 
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My last few articles have been on the topic of the personal balance sheet.  A while back I read about the concept of the personal balance sheet and one’s net worth being compared to a bathtub.  I can’t remember which book it was in, but here’s a shout out to whoever came up with the analogy.  Here’s how it works: You have the faucet and the drain.  If you’re thinking financially, you’ve probably already figured out that the faucet is your income, or money coming in, and the drain is your expenses.  The end goal is to get the bathtub as full as possible.

Obviously, if the drain is wide open, there’s a fair chance that the tube will never fill up because water is leaving as fast as you can get it out of the faucet.  Conversely, if you close up the drain and crank the faucet wide open, the tub will overflow pretty quickly.  If only it were so easy in real life, right?

The same concept does apply in our financial lives.  It’s important to keep more coming in than going out.  Our culture tends to think that budgeting is for those with a weak faucet, and those with a weak faucet think they can’t ever be rich.  This is the doing of advertisers selling their goods.  You have to remember that this is your REAL life. 

Any financial decision you make needs to take into consideration the effect it will have on your net worth.  That brand new car will be awesome, but it could slow the rate your bathtub is filling up, so maybe it would be better to buy a nice used car instead.  Don’t get caught up in the race with the Jones’s just to end up with an empty bathtub down the road.  Don’t fall victim to the idea that a wide-open drain signifies a full bathtub.  There are plenty of people out there spending every dime they get.  Once the faucet shuts off, and it does for all of us, these people are going to with they’d kept the tub full

The end discussion here is that you don’t have to have a huge faucet of money to “get rich”.  You also don’t have to completely plug your drain.  You just need to consider each decision in the context of your bathtub.  “Is this going to help fill up my bathtub, or is it going to drain my bathtub?”  Instead of thinking about what that next paycheck can buy today, think about how you can build wealth and protect against a rainy day with that paycheck.  In time, you’ll become one of the “millionaire next door” types who has learned to control their money, rather than their money controlling them.  Here’s to getting wet!!!


 
Picture
I graduated in finance from BYU’s Marriott School of Business Management.  One of the best, most useful courses I took down there is Provo was a personal finance course.  Some of the accounting courses didn’t stick until I worked at Zion’s Bank and had to relearn accounting basics.  Personal Finance, however, stuck well.

One of the best tools I found for managing household finances is a tool that investors use to analyze large corporations, banks use for deciding whether or not to lend to companies as well as individuals.  In face, you most likely filled out one of these when you obtained your home mortgage.   It’s called a balance sheet.

Let’s take a minute and pretend you are CFO of a corporation… oh wait, you are!  Your family.  Whether you’re a household of one or ten, you have to look at finances like you’re a CFO.  The best place to do this is through the balance sheet. 

The balance sheet is the tool used to determine your net worth.  In a nutshell, your personal balance sheet adds up the value of all the things you own; house, cars, gun collections, sports memorabilia, antique pianos, retirement and savings accounts, etc, and subtracts the debts or liabilities you have outstanding; you mortgage, car loans, credit cards, student loans, etc.  The difference between these two numbers is what we call your “Net Worth”.  The end goal in the money game is to have enough of a net worth at retirement to be able to retire and live comfortably.  If you do a really good job, you may even leave some assets for your beneficiaries to inherit. 

Now, a couple of examples may be useful here.  Let look at a home purchase first.  If you purchase a $250,000 home, but you have a mortgage of $200,000, you have a positive affect on your net worth of $50,000.  Once you pay off the mortgage, you’ll have a positive value of $250,000 towards your net worth.  If you buy a car for $15,000 and finance the whole purchase, chances are you’ll owe more on your car than you could sell it for, and thus, you have created a negative effect on your net worth.  Again, the end goal is to improve net worth enough so you can eventually retire.  Credit cards can be detrimental to net worth, as they usually have no real asset tied to the debt. 

In our free 52 week program, we offer a simple and easy to use worksheet to quickly determine your “Net Worth”, a snapshot of your personal finances.  We hope that it helps guide you in making wise financial decisions and gives you a better shot at the retirement you’re hoping to enjoy.


 
As we come down to the last minute on our Christmas deadlines, I thought I’d take a moment to talk about some money saving and budgeting tips for last minute Christmas activities.  So, here are ten tips for down to the wirte savings:

1.     If you haven’t sent out Christmas cards yet, don’t send cards… send postcards.  They are typically less expensive and definitely require less postage than a regular card!

2.     Don’t buy new Christmas decorations this year.  Use your old ones and then go for it after Christmas.  You can purchase your new decorations for next year on the cheap with the after Christmas sales.  Just a little delayed gratification!

3.     Things like a string of cranberries or popcorn are very inexpensive ways to decorate your tree, plus it will be a fun memory for you kids.  You can even make your own ornaments with construction paper, glue, tape, scissors, and some markers, crayons, and glitter.

4.     Instead of going to the movies, catch up on the rental dvd’s from Netflix and Blockbuster and Redbox.  Use the same popcorn you are using for stringing up popcorn.  One for me, one for you…

5.     Another fun activity, and very inexpensive at that, is a gingerbread house decoration party.  Everyone can bring an item to use decorating and you can see who comes up with the best design. 

Christmas is all about being with your loved ones and spreading peace and good will, so remember that the hustle and rush of the malls and black Friday aren’t going to as important as the memories and warm feelings created by being together.