Here's a good article I found on budgeting. Specifically, it lists five budgeting guidelines to use so your budget doesn't go bust. But first, the piece starts with a couple chunks of financial wisdom:
Some of us have forgotten a couple of vital principles:
1. Bank withdrawals must be preceded by deposits!
2. When your outgo exceeds your income, then your upkeep will be your downfall!
Ha! I love it!
Now, their five budgeting tips:
1. Don’t be overly optimistic. Remember, things often cost more than we expect.
2. Be kind to yourself. If you start on a budget that allows no fun or play money—it probably won’t last very long. Be reasonable, enjoy life. Just remember the importance of moderation.
3. Don’t forget the "set aside" items. These are expenses that don’t occur every month. Items like car insurance and vacations may come around only once or twice a year. Others, like buying a car, may only occur every several years.
4. It’s important to distinguish between what is essential and what is optional. Many of us are convinced that what we need is exactly what we already have—plus about 20% more. The truth is: Our needs are clothing, food, and shelter. Everything else is negotiable.
5. Keep your spending ratios balanced. Knowing how much to spend on what is an important part of a successful financial equation.
My thoughts on these:
1. I'm ALWAYS conservative when planning my budget. If anything, I estimate costs a bit high and income a bit low. I also keep the value of my house about $15,000 below market value when I calculate my net worth. Better safe than sorry, and I want any "surprises" that pop up to be good ones.
2. Both my wife and I have what we call "personal accounts" we put in our budgets. This is a set amount that each of us can spend on anything we like -- with no comment or input from the other. In addition, we budget funds for entertainment, vacations, and babysitting (so we can get out).
3. The best way not to forget about "set aside items" is to review your checkbook and credit card statements for the past couple of years and make note of those "non-regular" expenses. I simply refer to past budgets.
4. I could go on all day about this one. Instead, I'll simply say that true needs are much below what the average American would classify as needs. The author of this piece notes that he once had a client who said cable TV was a need. I believe it. I once had a person who was deeply in debt who said a weekly manicure (at $20 a pop) was a NEED. Sheeesh!
5. These will be different from person to person, but the article provides some good guidance to get you started.
What's odd about the story is that, though the author is touting his Christian money management ministry, his suggested spending percentages don't include any sort of charitable giving. The percentages don't add up to 100% in any case, so perhaps he just left it out. Or perhaps the "true net income" he mentions has a tithe already built in. But it's odd that a putatively Christian perspective on money doesn't feature charity more prominently.
Perhaps the editors at Crosswalk edited it out or something.
--
Matt Laswell
Posted by: Matt Laswell | April 14, 2006 at 03:05 PM
Matt --
Many Christian financial advisors do use the following formula:
Gross income - tithe (10%) - taxes = net spendable income
Then they budget from here (including offerings -- which would be extra giving above the tithe). Since this article is an excerpt, the only way to find out if this is what he means is to read the book.
That said, the article is not really about about the percentages as much as it's about the budgeting tips (which is also what my post focuses on).
Posted by: FMF | April 14, 2006 at 03:48 PM
Great Tips! I agree with you on the "personal account". I do exactly the same thing. I can spend it on whatever I want without asking the spouse. When you do this you completely loose all of the guilt of spending on something frivolous you really want. I also have an item called “Personal Account – Bonus”. If I get a bonus at work AND if we are on track with the rest of our budget – then we give ourselves each a bonus – now that is fun!
Now here are my 5 additional budgeting tips I would like to share from my own experience. YMMV:
1. Use software – Qucken / Money / Whatever. If you don’t keep good records, how do you know what you are spending to even make a budget?
2. Keep it simple – When I first did my budget, I tried to get really detailed on categories. I had categories for just about everything. Over the last couple of years I learned to whittle that down significantly. I have my big categories such as Utilities, Insurance, Taxes, Medical, mortgage, etc. These are all the monthly expenses that are regular and re-occuring. Then I have what I call my “Budget” categories. These are the categories where I directly spend the money at a store: Entertainment, Gifts, Groceries, Household, Kids, etc. Each pay period I take out the CA$H needed for the budget categories. Guess what? I never overspend those anymore.
3. Budgets take time – It has taken me a couple of years to refine my budget to where it is today. Now I know when every bill (such as yearly car registration) is coming. It is all dialed in to my software. You can’t just slap one together and expect it to have everything the first try. Don’t get discouraged, you will forget things but it will not take long to get it right. Now this may sound crazy, but after I had my budget nailed down I actually “enjoy” when my bills come. Do I like paying bills? Nope…but it was really cool when they come and match my budget and all the money is right there to pay it. Now that is a good feeling!
4. Budgets are Living Documents – I used to think once I set my budget, it could not change during the year. Bull. If I have worked extra hard and have extra income, I want to enjoy some of it – or put it toward budget categories that I have gone over. Take for instance this year, we are doing great and on budget. Since my income is better than expected we decided it was OK to buy a new sofa. When my wife looks at the budget she sees a big RED number showing we are over and it freaks her out. Well – why not adjust your budget? Keep in mind you have to be very disciplined to do this! You cant just change it because you overspent a category to make you fell better when you have nothing to balance it out.
5. Make your budget equal $0.00 – I know when many people do their budgets, they take what they earn, subtract what they will spend and say “I will just save the rest”. I budget everything – even what I will save. If you don’t – I bet you wont save it!
Posted by: Terry | April 14, 2006 at 05:34 PM
Estimating the value of your house on the low side is an excellent idea. Even assuming that you sell it for exactly what you believe the fair market value to be, there are always transaction costs. In reality, most of those costs are being covered either from the price the buyer is paying, or out of the seller's pocket if the seller is selling at a loss. However, when they are covered by the price the buyer pays, they are bundled in the sale price. The big one is the realtors' commissions, but there are others: title search, attorneys, etc. In the end, the check you walk away with is less than the difference between the sale price and your mortgage balance.
Posted by: Anonymous | April 17, 2006 at 10:14 AM
Does anyone know if I buy a rental property with a second mortgage on the home we live in - can I still write-off closing costs and take a loss if the rent doesn't cover the mortgage+taxes+insurance ? In other words the second mortage on our home property is xxx(+insureance+taxes) and the rent is yyy - yyy is lower than the first number. Does it matter that the mortgage is on our home property (but it was used to buy the rental property). Can I still claim a loss with this example? Hope I said this so it makes sense. Thanks in advance.
Posted by: Sandy | July 02, 2008 at 10:49 PM