Spend Less Than You Earn

Do you spend each month wondering where all your money has gone? If your paycheck keeps disappearing before you have put anything into your savings, it’s time for a budget. A budget reminds us of a simple truth – we all must spend less than we earn. If we stick to this principle, we can increase our savings for retirement and eliminate debt that is weighing us down. You may also find that creating and sticking to a budget can be fairly painless.

Here’s how to get started…

STEP ONE: Establish Your Financial Goals

Before you start mapping out how much money will be allocated to different areas, sit down and determine your goals. What short-term goals do you have for the next five years – reduce credit card debt, buy a new car, travel more? Then, what long-term goals do you have for the next twenty years – fund your children’s education, buy that bass boat, how about retirement? How important are these goals, what will you need to do to accomplish them, and what resources will you need? Armed with a clear picture of your goals, you can work toward establishing a budget that can help you reach them.

STEP TWO: Show Me the Money

The purpose of a budget is to track the money coming in and the money going out. The name of the game is to save more and reduce debt. There are several different options on how to create and maintain a budget, but the key is to find a system that works for you. It can be as simple as a pencil and paper, or there is plenty of good software out there if you want to get more sophisticated.

Identify your income – the most obvious source of income is your paycheck, but do you have other sources? What about investment income, child support, life insurance, family inheritance? These should also be included along with any other money that is coming in.

Identify your income – these can be separated into two categories. Fixed items are those that are constant every month and easily budgeted (rent, utilities, food and transportation). Discretionary items are those expenses that fall outside of the normal necessities of living (entertainment, travel, hobbies and that $3 daily cup of coffee).

Make sure, also, to identify periodic expenses that can eat away at your budget, such as: insurance, holidays, home and auto repairs and so on. Whenever possible, treat your goals as expenses and contribute toward them regularly. You can budget for a night out instead of breaking the bank by splurging if you fall off the wagon.

STEP THREE: Compare the Numbers

After establishing where your money comes from and where it goes each month, compare the numbers. Are you spending more or less than you make? What areas are really draining your checking account? Where can you make some cuts? If you have a profit at the end of the month, where is that extra money going?

Look at your expenses closely and cut down on unnecessary spending. Also, remember if you do find yourself coming up short, don’t panic! It will take some determination and a little self-discipline, but you may surprise yourself at what you can do in a few months with a sound budget.

STEP FOUR: Keep a Watchful Eye

Maintaining a budget is more than determination on that first day when you wrote everything down. You need to regularly (monthly) take a look at your income and expenditures to make sure you are still on track. It isn’t necessary to write down every penny that you spend as long as you keep with our guiding principle – spend less than we earn.

It is easy to get side-tracked financially, so be prepared for the unexpected. If you slip one month, just try to make it up the next. The key is to be flexible, yet disciplined.

Tips to Help You Stay on Track

  • Find a budgeting system that works for you.
  • Start your new budget at a time when it will be easy to follow and stick with the plan (e.g., the beginning of the year, as opposed to right before the holidays).
  • Involve the entire family – agree on a budget up front and meet regularly to check your progress.
  • Distinguish between expenses that are “wants” and those that are “needs”.
  • Stay disciplined – Make budgeting a part of your normal monthly routine.
  • Build rewards into your budget, but plan for them (e.g., eat out every other week).
  • Avoid using credit cards to pay for everyday expenses. It may seem like you’re spending less now, but you eventually have to pay that credit card bill.

This article was first published in the Winter 2008 edition of the Retiring Right newsletter. Click here to view other newsletters. Not receiving your newsletter, update your address by completing the Change of Address form.

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