Financial Freedom: Budgeting and Living Within Your Means
Finances seem to be a top concern for almost everyone, so I would like to share some conventional wisdom for budgeting, living within your means, reducing debt and increasing savings.
Before you can budget your money, you need to know what you spend. Start by going through all your bills, and listing the amount owed monthly for each. Then, carry a notebook, and record every penny you spend or make, for the next month. This will give you a good idea of your habits and leaks.
The next step is to plug these numbers into a simple chart, like this one:
- List all Income:
- Subtract Taxes and Payroll Deductions: Self-employed, make sure you compute these expenses accurately! You don’t want to run short and have to take out a lone.
- Federal Withholding:
- Social Security
- State and Local Taxes:
- Union Dues:
- = Spendable Income:
- Taxes, insurance, and maintenance:
- Phone & Internet:
- Improvements to save for:
- Auto Payment(s):
- Gas, tolls & parking:
- Licencing and Taxes:
- Mass transit fares:
- Debts: All debts that are not home or auto related. Record total amount owed and minimum payments.
- School/Child Care:
Are you spending more than you make? How can you change that?
Living Within Your Means:
This is an area that calls for much discretion and honesty. What do you really need? Can you afford your lifestyle?
If you find that you are spending more than you make, or are not able to maintain what you have, it is time to make some decisions about your lifestyle. I recommend looking carefully at every area, and determining one small change you can make.
One of the easiest ways for me to cut out waste, is to think yearly. Take those small daily expense, and figure out what they cost per year. Is that cup of coffee really worth it? How much could you save by brewing it at home?
How often do you eat out? How much do you spend on your clothing? If you are married and have children, is working outside the home in your best interest? Ouch! I know this is a touchy subject, but it is worth figuring how much you really make, once all the expense of related to your working are deducted.
- Gross annual income:
- Gross weekly income:
- Restaurants/Convenience Food:
- Work Related Clothing:
- Child Care:
- Total Expense:
- Net Additional Family Income:
- Net Income/Hour:
When we wanted to buy our home, I looked at going to work outside the home, but figured out that I would have to make close to $16/hour, just to bring in $1000/month (the minimum amount I was willing to leave my children for). At that time, the best jobs I could find started at $12/hour, with very slow growth. Running a home-based business was a much better plan for us.
If you find working outside the home needed or to your advantage, consider these ways of making it more profitable.
- Work Part-time, and trade child care with another mom.
- Work weekends or odd shifts, which often pay more, and allow your spouse to watch the children.
- Carpool or use public transportation.
Reducing Debt and Increasing Savings:
Once you are on a budget and living within you means, it is time to start saving and reducing your debt. This is the plan I am using to get ahead:
- Determine how much extra you have each month to use in this manner, then guard it!
- Save one months worth of living expenses. This money is to help out in emergencies, so you do not have to barrow to fix your car or travel to a funeral. If you should need to use it, replenish it as quickly as possible.
- Pay off credit cards.
- List all amounts owed, along with minimum payments.
- Make the minimum payment from this month your standard payment, plus any extra put on the card.
- Use your ‘extra’ towards paying off your highest interest card–or if you like immediate satisfaction, your lowest balance.
- When one card is paid off, apply all that you were paying to the first card to the second one. This is called the ’snowball effect’, because you will see things being paid off faster and faster.
- Save another months worth of living expenses. Now that you no longer have credit card debt, this number is lower than it was before!
- Pay off discretionary and recreational purchases, like boats, four-wheelers and tractors/lawnmowers. Use the money that you were using to build your savings.
- Save another months worth of living expenses. You now have three months worth!
- At this point, split the amount of the extra between paying down your auto debt(s), student loans, etc. and savings. This step is complete when you have six months worth of savings and only your mortgage for debt. With six months worth of savings, you should be able to buy your next car out-right, thus saving yourself interest!
- Decide a certain amount to invest, either for retirement, further education or world travel…what ever really appeals to you that you have not been able to do! With the rest, pay off your mortgage.
- Save One years worth of living expense.
Remember to celebrate each step of the way. When one step is completed, I usually take one months ‘extra’ and put it towards some splurge that we have been wanting, or an extra nice date with my husband.
Don’t get discouraged if the going is slow. Take it one day at a time. If something goes wrong, and you get off track, start again. If everything stays steady, we will be debt free in ten years…however, life is not consistent!
Once you are debt free, you will have more time and money on your hands, to do what you really want to do.
All Text and Photos (c) Copyright 2010
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