5 Strategies to take charge and take control of your money - part 3

May 7, 10:56 AMWomen and Money ExaminerPatricia Stallworth

Let’s face it, taking charge and taking control of your money can be scary on a number of different levels, but it can also mean that you get to design the future of your choice. Just stop for a moment and imagine the possibilities when you are in control of your destiny, and taking control of your money is a giant leap toward doing just that. Here are five strategies you can use to get started:

The third strategy in taking charge and taking control of your money is creating a budget. I know that many of you are not really fond of the “B” word for a number of reasons. Some of you feel that a budget is too constricting, that it takes all of the fun out of living, or that it is just too much work. But it doesn’t have to be that way. Once you know the basics, you can tweak your budget to fit your lifestyle and have it include as much or as little detail as you like.

Why a budget?
A budget gives you the information you need to make informed decisions about your spending. One of top reasons people fail financially is that they consistently spend more than they make and that keeps them in a vicious cycle of debt. A budget helps you stay on track with your spending and on track to achieve your goals.

Creating a baseline budget
There are three main components in a baseline budget – (1) how much is coming in; (2) how much is going out; (3) and where it is going. Skipping any of these or not thoroughly completing them leaves you open and vulnerable to the possibility of things just slipping through the cracks or spending that puts you in jeopardy.

Begin the process with the last component first by tracking where your money is going. Use an online worksheet, an extra checkbook register, or a journal and keep track of your spending for a month. Write down everything that you spend and also review your statements, receipts, and checks so that you can get a good idea of your spending habits. Once you have this information, you a basis for developing part 2 of your baseline budget – how much money is going out.

Using the information you collected, break your spending into categories – rent/mortgage, food, recurring bills like utilities and cable, credit cards, loans, and entertainment, and calculate the annual amount you spend in each category. Use categories that fit your lifestyle and be sure to include big expenses that may only occur once or twice a year like insurance. Once you have a list of all of your expenses, calculate the average monthly amount by dividing the total by 12.

Next, calculate what is coming in. Go through all of your pay stubs, and again calculate your average monthly income. Don’t forget to include any unusual income such as interest or bonuses. Now, for the moment of truth. Subtract your expenses from your income. Obviously, if your expenses are greater than you income, you will need to go back and make adjustments in your spending until your expenses are no greater than your income, but in either case, there is more work to be done to create a budget that will work for you over the long term.

Creating a lifestyle budget
Now that you have a baseline budget, you can now begin to develop a budget that fits your lifestyle and what you want to accomplish. This process may take some time, so try to be patient. Here are three strategies to consider as you build your lifestyle budget:

1. Develop a budgeting strategy. I recommend starting with a 20/80 strategy where you take 20% of your income off the top, divide it among saving, investing, and charity, and then use the remaining 80% for household expenses. This ensures that you will always have money available to achieve your goals (retirement, emergency fund, etc.) and it can greatly simplify the budgeting process since you only have to limit your spending to a certain percentage of your income. Note: As your income increases or your expenses decrease, be sure to adjust the percentages so that they always reflect your spending and savings goals.

2. Continuously review your expenses and look for ways to cut back on your “wants,” and possibly even your “needs.” True “needs” are somewhat limited – food, shelter, clothing – and nearly everything else can be categorized as a “want.” Depending on the goals you want to accomplish, you may need to limit your “wants” in favor of accomplishing your goals. And, in some cases, you make also need to cut back on your “needs” if they are out of line with your income. For example, if your housing costs are greater than 30% of your income, look for ways to cut those costs such as taking in a roommate or downsizing. But always include some ‘fun money’ in your budget, otherwise you may have a difficult time sticking with it. I believe you can have it all, but maybe not all at the same time.

3. Monitor your budget and your compare actual expenditures to your projections. The best budget in the world is of little use if you never test it. Make comparisons each month for a few months and if necessary keep tweaking your budget until it works for you, your income, and your goals. Once you reach that point, you can cut back on the number of reviews each year, but do check in once in a while just to be sure you are staying on track.

I will admit that creating a workable budget takes time and it can be challenging, but it can also be one of the best tools you have available to create a secure financial future so don’t just brush it off without giving it your very best effort. “Remember, if you don’t mind your money, someone else will, and then they will control you future!” ps

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For more info: There are several options available to complete a budget. There are software programs available like Microsoft Money and Quicken by Intuit, you can use an online site like www.dinkytown.com, or you can develop a manual system like the envelope method.