Blogs > Your Money

Dave Patterson and Erin Preston, a father-daughter team of Certified Financial Planner® licensees, provide thoughts and suggestions on a broad collection of personal finance topics.  Information provided in this BLOG is intended to be of a general nature and may not be appropriate for all situations.  Readers should consult with their own financial advisors before relying on any information contained herein.

Monday, July 27, 2009

Maybe It’s Time for a Budget - Part II

Our last post discussed the fact that nearly everyone has lost a significant amount during the recent market downturn and that we need to be careful to avoid chasing the latest “hot investments”. One way to recover some of the loss to our portfolio is to save more. And, one way to do that is to save more by creating and following a budget.

So what should you do to establish a budget? First and foremost, you need to sit down (with your spouse or significant other, if you have one) to define and prioritize your financial objectives. What is most important to you: early retirement, college for your kids, a new home, travel, a new boat? It is likely you have more wants than your income will support. That is why prioritizing and communicating with your spouse is very important. It helps make spending decisions much easier with clear goals in mind.

If you do not know where your money is currently going, keep track of it in detail for at least thirty days (three months would be even better). If you are relatively computer savvy, software packages such as Quicken® and Microsoft Money® can help with this task and ongoing budget management.

Next, identify all of your fixed monthly costs (mortgage payment, car loan, utilities food, taxes, social security, etc.). After the fixed costs have been identified, detail the variable costs such as dining out, entertainment, gifts, travel, hobbies, and so on. Next, review all of the fixed and variable expenses in detail to see what can be eliminated or reduced. Do you really need that latte every day on your way to work? Could you survive with a less costly cable package? What is more important, getting all the movie channels or helping fund your child’s college education?

If you subtract your monthly fixed and variable expenses from your monthly gross income, you are left with money to be used for discretionary items. Make sure you set aside enough for your top financial objectives. If there is not enough to make satisfactory progress on achieving those objectives, you need to re-examine your budget to see what can be cut out or find other ways to boost your income.

You will also find that there are some creative ways to reduce your spending. How about going to the library to get the latest novel you want to read or DVD you want to watch. “Free” is a lot cheaper than that $40+ movie cinema tab. What about finding some freelance work on the side? Try to turn your hobbies into a way to earn some more money. A creative budget does not have to limit your social life. It is highly probable that you have several friends or family members in the same situation; be creative together, you might even find that there is “fun” in being more frugal. It is a different era now; it is time to be more humble and realistic. It is time to take charge of your finances.

Even if you do not continue to follow your budget in detail, just going through the above process may be an eye-opener. We have only touched on the highpoints of budgeting but we hope you can see that a budget can be a useful tool to help you achieve your goals.


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