What’s In Your Wallet: Make a Budget
Know What You Spend
As a bankruptcy attorney that specializes in consumer debt, I see a lot of people’s personal finances during the helpful consultation. A common problem is that they have no idea what they spend each month and don’t realize they’re often spending more than they earn. This underscores the importance to track your spending and make a budget.
Know the Score
When you are sick, you pay careful attention to the medicine that the doctor prescribes. When you’re on a diet, you pay attention to the food you eat and weigh yourself every day (ok, every month). Yet most of us don’t track how much we spend each month. You may know how much you spend on fixed bills like rent, but chances are that you don’t know to the nearest $100 how much you spend in total.
A budget is essential to taking control of your finances. Maybe there is a place you can tighten your belt. Maybe there isn’t. How do you know where to cut back if you don’t even know what you’re spending?
Count How Much You Earn
The good news is you probably earn more income each month than you think. Most people are paid biweekly. That is, every other Friday. So is that two paychecks a month? Not exactly. Two checks a month, times 12 months a year would be 48 checks a year.
But there are 52 weeks in a year. Where did the extra money go? It went to you: twice a year, you get three paychecks a month. That means you don’t just double your biweekly check to get a monthly number, but a little bit more than double (2.1667). Great! You make more money than you thought.
Where does it all go?
Figure out what your average monthly household expenses are. Yes, you should count it and look at your bank statements to really know the numbers. Yes, electricity will cost more in the summer and less in the winter as the air conditioner use fluctuates. On average, though, what is it? Now do that for natural gas, cable/satellite, etc.
When you get to food, watch what you spend at the store, which will also include detergent and other non-food things. Then separately count what you spend at restaurants, Starbucks, and Subway. Don’t count the credit card payments, though. Hopefully you know how much it takes to support your household each month.
Surplus or Deficit
Now the big question: on average, what’s left when you subtract average expenses from average income? Is it what my math teacher called a positive number? Great job! You have a surplus. You have money left for savings (or paying debt). If it’s a negative number, that probably will put you in a negative mood, as you’re likely stressed each month on how to make ends meet, let alone repay debt (or save), as you have a budget deficit that puts you underwater each month. Solving a deficit is as easy — and complicated — as raising your income (second job, renter, etc) or cutting expenses (do you really need those lattes?).
But what if you don’t even know if you’re over or under budget?
Prescription for Out-of-Shape Budgets
Try this for one week (or better yet, for a month): you don’t need to track every penny, but why not track every dollar you spend during the day? Save your receipts and jot down your daily expenditures. Keep a running tab so you know your month-to-date spending every day. When given a choice, use your debit card, not cash. Now you have a receipt. Keep your debit receipts to make tracking easier and to make your spending more visible. Enter everything in a budget worksheet in Excel.
The Danger to Tracking your Finances
The biggest enemy to track your spending is the ATM (and now Samsung Pay and ApplePay, with your phone!). You’ll be surprised how many “little things” gobble up those $40 withdrawals: cash for Starbucks here, cash for a bagel there. You then pay with cash as you go out for lunch, and there goes another $10 and it’s not even 2 pm yet!
Once you make the commitment to track your spending, you can see where you can cut back if you need to. Give yourself an allowance of spending money: one ATM withdrawal of cash per week. See if you can make that $20 or $40 last the whole 7 days. Make the commitment to spend no more cash than absolutely necessary. And continue to track each dollar.
Track your Spending
You can’t fix the problem until you know what the problem is. Track your spending can help you cut back where there is waste. Most importantly, adjusting your spending can help you meet your ultimate goal of saving money to pay off your credit card bills, a down payment for your own home, or for your retirement.