Personal finances are always on the top of the list for most common New Years Resolutions. Here is a review of the budget process for your consideration.
Income
- Make sure you account for all net (after taxes) income
- Look beyond your paycheck
- Rental Income
- Bonuses
- Gifts (may be hard to plan for)
- Investments and dividends
- Child support or alimony
- Other (analyze your life, is there anything else you can think of?)
- First, plan on putting as much money as you can afford into your 401(k)
- This money is set aside before taxes allowing you to save and reduce your taxes
- Then put as much as you can into Savings
Expenses
- Fixed
- Fixed expenses do not change from month to month
- Car payment, mortgage/rent, school loan payments, utilities (if you are on a fixed rate plan)
- You have little control over these expenses
- Variable
- These expenses change each month
- utilities not on a fixed rate plan), gasoline, medical bills, entertainment
- You can control most of these expenses, up to a point
- Get creative, how can you cut down on these expenses
- Use your AC less, carpool more, etc.
- Don’t forget periodic expenses such as insurance and taxes
Black Holes
Is there anywhere money goes that you could eliminate, some good examples are:
- Cable Television, Car Washes, Cigarettes, Cell Phones, Coffee, Lunches Out, Alcohol, Vending Machines, Bottled Water, Interest Charges on Credit Cards, Manicure, Unused Memberships, etc.
- Keep a record for a few weeks of every dollar and penny you spend, this will help you find your spending black holes
Budget Guidelines
Housing including taxes and insurance shouldn’t exceed 30% of your gross monthly income.
- All other monthly debt payments combined (credit cards, card payment, personal loans, etc.) should not exceed 20% of your monthly gross income.
- Never pay just the minimum payment due. If you have a $2000 balance on a credit card at 19% interest and pay the minimum due, it will take 23 years to pay the account off even if you never charge another dollar.
- The amount outstanding on all unsecured credit accounts (credit cards, department cards, etc.) should not total more than one month gross income.
- Try to get six months (minimum) of living expenses in a savings account before taking on any new debt.
- Make down payments as large as possible. This will require you to save money, which gives you time to research your purchases. It will also cut down impulse buying.
- Always read contracts very carefully, check for cancellation/closing penalties.
- Close any accounts (except the oldest ones) you do not use. It is not good for your credit history to have lots of open accounts, it just makes you a high risk in the creditors eyes.
