Budgeting Tips for New Budgeters

If you’re going to prepare for retirement a critical element is learning to develop and follow at least some sort of budget.  If you are like most people, budgeting is not at the top of your priority list on ways to spend a Saturday afternoon.  But you’ll discover that it’s one of the most effective ways to get ahead financially if you stick with it.

You can also improve your retirement contributions, as well as pay your debt down more rapidly, by learning to budget well.  You could find yourself free of debt years earlier than you expected by incorporating good budgeting practices into your financial plan. Budgeting can also make it easier to survive the surprising financial emergencies that can come up by building up an emergency savings fund.

If you use a budget now, or have tried to in the past, you know it can be a real challenge.  Here are a few steps to help you stay with your budget and stay on track to financial success.

Crack down on your wasted spending and save money right away:

Go through your current bank statement and write a description of what each amount of money was spent on.  Next, add up the items that you really didn’t need.  It’s also common to see that there are some items you bought that you wasted more money on than you thought.  You may find that you spend too much money on things like going out with your friends or eating out for lunch.

Focus on building your savings for emergencies:

You should work towards building up adequate savings to handle an emergency that may comes up, or a period of unemployment.  The last thing you want to do is to have to use a credit card and pay interest on an expense you didn’t plan on or budget for.  Use your budget to determine how much you could put into your savings every week or every month and get started.

Use cash with more awareness:

You want to use cash or a debit card instead of credit cards whenever possible.  Avoid using your credit cards because they have a compounded interest rate.  The interest that builds up can get away from you and could lead to more financial trouble.  You’re also better off not having a lot of cash on you since it’s easy to spend without realizing how much you have spent.  Spending should be part of a plan and not something you do because you have money available.  Use your debit card whenever possible because it’s easy to track and scrutinize your spending. And finally, stop carrying your credit cards if you have difficulty not using them.

Eliminate bad habits:

Some of these could be costing you a lot more money than you realize, like your daily visit to the coffee shop, smoking, or going to the movies every weekend.  It’s easy to ignore your spending habits while tracking them takes more effort than you may be used to spending.  You have to decide what’s important to you.  Are you working towards a retirement goal?  Ask yourself how you are going to get there.  You can start by listing the habits you have that are wasting money and put an end to them.  Little expenses add up over time, and some of your small habits that don’t seem like they cost very much might actually be costing you tens of thousands or more in retirement income in the future.

Share the responsibility with your family:

Everyone in your home should understand and have a part in budgeting and following the budget.  Let everyone in your household know what you are trying to achieve so they are supportive and understand why they can’t spend more.  Show them how they can help by not wasting, and by planning before spending.  Sit down with your spouse and make a plan for your spending and budgeting.  You’ll want to check in every week to make sure you are staying on track, or decide how to get back on track if you happen to stumble of course.  Arguments and disagreements over money are among the leading causes of divorce.  Sticking to your budget can help relieve stress and could minimize or even prevent financial strain from taking its toll on your marriage and your family.

Pay down your debt:

If you don’t have a plan for your debt you need to create one now and start following it faithfully.  When you’re struggling with debt, you may feel like it’s going to take forever to pay it off, and it usually will take several years longer if you have a mortgage.  Over the last few years, retirement accounts have taken big hits and fallen considerably.  The stock market has proven that it cannot be depended on.  One of the only ways to get a guaranteed return on investment comes from paying off your debts and not having to pay the interest on them anymore.  Every time you pay off a debt you also eliminate the payment associated with that debt.  It often takes years and you need to have the discipline to follow through every month.

Re-examine your latest spending and expenditures:

Review your spending every month to see your budgeting progress and to check for other areas to improve on.  Continue to critique your statements and receipts to look for more opportunities to cut your spending.  Think about taking lunch with you to save more money.  Set up a carpool with a buddy or someone you work with.  Make little cuts where you can to increase the amount of money you have to save, or put toward paying down your debt.  Sticking to a budget is critical to paying off your debts.

Budgeting is essential to getting a handle on your finances and building up the retirement you want and deserve.

Six tips for Handling Recurring Expenses

While one-time expenses are the easiest to remember, it’s the recurring expenses that tend to add up the most in the long run.  They’re also the hardest to trim down, but the payoff is usually worth the trouble.  Let’s take a look at how to evaluate and slim down the day-in-and-day-out items in your budget.

1. How much do you really use it? This especially holds true for anything that you pay for regardless of whether or not you use it, like membership fees to a club. Be realistic and judge the cost vs. value based on how much you’d actually use it, not how much you might conceivably use it. For instance, Costco has a great price on vitamins, but that’s the only thing I’d normally purchase there. So once a year or so, I just ask my friend to pick up some vitamins for me since she has a husband and family, it makes sense for her to have a membership, though it doesn’t for me.

2. Think twice before making a one-time purchase into a recurring expense. On several occasions I’ve enjoyed reading an issue of a magazine, and then in my enthusiasm signed up for a subscription, only to find out that I don’t end up having time to read it on a regular basis. (Or maybe the subsequent issues don’t turn out to be as interesting as the one that caught my eye at the bookstore.) Yes, signing up for a subscription or recurring service can save money… but only if you’d definitely be making that purchase every week or month anyway. If it’s a “once in a while” purchase (like how I am with newspapers), then it’ll be more cost-effective to pay the slightly higher price to just buy it individually when you want it.

3. Calculate the yearly cost. Somehow this tends to bring home the impact of smaller recurring expenses… is that $3 daily latté actually worth $1000 every year? Seeing the numbers can be a great motivation to make small but effective changes. I really enjoy going out to coffee shops, because I find them a great place to work (I’m writing in one right now, in fact) but there’s a good reason why I’ve taken to drinking regular coffee ($1) rather than espresso-based drinks ($4).

4. Look for alternatives. Many recurring expenses can be avoided by making a one-time purchase instead; even if the one-time purchase is more expensive than a single “dose” of the recurring expense, it will often pay for itself over time. Consider the purchase of DVD player and subscribing to Netflix (or visiting your local library’s DVD section) instead of paying for cable every month.

5. Be ready to cut it off. Even if a recurring expense makes sense right now, six months from now things may have changed. You may decide you don’t actually like the magazine that you subscribed to, or you’ve discovered that you enjoy going for a run around the neighborhood better than going to the gym. If you’re not using it, cancel it! Don’t pay for a service or product that you don’t need or want. For instance, I discovered that I really liked having a cell phone, and decided to drop having a land line. It seemed weird at first, but there was no sense in having an overlap in utilities that cost me an extra $30 every month.

6. Consider adding some “good” recurring expenses. Yes, adding! We’ve probably all heard the “pay yourself first” idea for personal savings (and it’s a good one). Why not apply it to other good causes? If you’d like to give money to charity, but don’t have a plan for doing so, good intentions often end up going nowhere. I discovered that “I’ll donate to that organization one of these days” pretty much always meant “never”! So think about what’s meaningful to you, and consider making it a recurring expense so that it actually happens. For me, my contributions to my church became more mindful and thus more meaningful when I sat down and calculated a percentage that I’d give, and then made it the second most important line-item in my budget (right after my mortgage and utilities).