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Budgeting in a recession
Now more than ever American households are having to learn how to budget. In the midst of a recession, many families are finding themselves stuck with continually mounting bills and perhaps a decreasing income.
Budgeting is something people who are normally well-off or have done instinctively for years. After talking with a friend the other night about their need to stick to a budget to get their debt under control, I started thinking, if I had to create one, where would I start?
I will add that I was blessed enough to have two parents who both were excellent at budgeting, a necessary survival skill I suppose when you are supporting a family of seven on one income. And within the past year I have taken budgeting to the extreme in my own household in order to better afford things I needed and wanted: car payments, college tuition and loans, mortgage and the repairs that go with it. Right off the bat, I will tell you that budgeting ain’t easy, and just the word scares most people off or puts them into a state of denial: “I don’t need to budget, I do just fine.”
Well, the truth is, we ALL need to budget. Simple budget changes like controlling the amount of times you eat out a week and how much you spend on groceries can save you a lot of money and take a lot of stress out of the financial side of your life.
So enough pep talk. Here are some simple tips to start your own budget.
Calculate your expenses vs. income: Over the next week, make a spread sheet in a program like Excel or on a simple piece of notebook paper. In one column, write down expenses for each day, i.e. track how much you spend daily on things like food, gas, entertainment, etc. This will help you figure out where your money goes during a normal week. Everyone in the household should do this. In the next column, write down monthly expenses, i.e. mortgage, loan payments, utilities, insurance, taxes and any charitable contributions you make regularly. Add to this your credit card balance right now.
Now add up your daily costs and multiply that by 52 weeks. Add up your fixed monthly costs (mortgage, etc). Next, find out what your net weekly or monthly pay is (take-home pay after taxes and such). If you can only find your weekly, multiply that by 52. If you know the monthly, multiply by 12. The take your net pay and subtract your costs.
It seems simple but by actually tracking those weekly costs (and not cheating) you really get a sense of how much money you are paying out. Hopefully you’re not in the red already. And why did you add your whole credit card balance? If you are someone who holds a credit card balance each month, you are probably paying somewhere between 10-25 percent interest on the balance. A goal should be to pay off the balance each month.
The amount of money left over after you subtract out living expenses should be 20 percent. For example; if the monthly expenses are $1,000 and your income is $1,200, your net household income is $200 If the amount is under $200, you need to do some adjusting.
Now you should figure out to create an emergency savings fund. Never, never has this been more important. If you were to lose your job or be unable to work your normal shift, you need to have enough money to cover expenses for a minimum of 6-9 months. For example; if you earn $1,200 per month, I recommend you have between $8,000 and $10,000 in your emergency fund. Once established, leave the fund alone, you do not have to add to it unless you use it.
You should also create a general savings account. This is harder to put a dollar figure on. Once you are finished creating the emergency fund, consider creating a new savings account just for expenses that pop up and things you want. This account should have at least one month’s net earnings in it, really, and will cover things like home repairs that jump up, unexpected bills or wants. Yes, wants. You can have a budget and still have things you want. The key is to remember to save for them and not just charge them.
So this is the simplest way to create a fool-proof budget. If you have other ideas, please share them here. I will go into how to shave expenses from your budget and how much this can save you in tomorrow’s budget.
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