Where Do I Start?

Getting control of your finances can be a very difficult thing. It is messy. There are a lot of moving parts. It can even be downright terrifying! Relationships usually complicate things even more. You can easily feel completely overwhelmed. So you might find yourself asking, "Where do I start?" This is a great question because it shows you are ready to start.

First, unpack your financial baggage. Take a good long look over the last few months of bills, spending, and debts. Pull a copy of your credit report to make sure you aren't forgetting anything. Lay it all out and take a good look. At this point, one of two things will happen. You'll realize that things aren't as bad as you thought. Or your numbers are sobering because things are worse than you expected. Both of these reactions are alright. The important thing to remember is you need to know where you stand in order to do something about it.

Second, balance your budget. There are only two sides to the equation- Income and Outgo. If your expenses are more than your income, which is very common, there are only two things to consider- cut expenses or raise your income. Usually a combination of both is needed. The deeper you cut, the faster you can pay down debt.

Third, Prioritize your spending. This is essentially a budget- telling your money where to go. Start with food. How much money does it take you to buy groceries? I'm talking basic groceries, not pricey pre-packaged convenience foods. You would be surprised how much you can save just by meal planning, food prepping and shopping sales. Even if you have food allergies or special diet considerations, cooking at home is cheaper and healthier than eating out. It takes time and planning, but no matter what your circumstances, you can trim this expense. Next you want to pay for housing. This includes your rent or mortgage, all utilities and insurance. Transportation is next. Pay your car payment(s) and gas or buy your transportation pass. Last is clothing. Again we're talking basics. You would be surprised at what you can find gently used at your local thrift store. These are what form your four walls. If you can afford these, no matter how bleak your circumstances, you will live to fight another day because you've got a roof over your head, clothes on your back and food in your belly and a way to get to work.

Fourth, consider selling something. This can be a car that is ridiculously expensive. A good rule of thumb to sell is if your vehicles total more than half your annual income. Or sell extra stuff you don't use or need anymore. Have a big garage sale or sell items on Ebay, Craigslist, Facebook, Instagram or other online yard sale sites. The house is the last thing I would consider selling and that's only if the payment is half your takehome pay with no prospect of having your income increase dramatically.

The Fifth and final thing you need to know to get started is to keep going! If you are new to budgeting, give yourself a solid 90 days to get used to it. I guarantee there will be hard, horrible days, but I promise it's worth it. I've been there and can tell you there isn't a greater feeling than seeing the fruits of you labors.

Stop Eating Your Retirement

One of the saddest things I see while helping people with their finances are those nearing retirement who have worked hard their entire lives and have absolutely nothing to show for it. What's worse is when I see young couples in their 20's or 30's spending everything, every month. I know what it's like to be this way. I remember rationalizing that it was okay because we weren't spending  more money than we had... Boy was I wrong. 

"There is treasure to be desired and oil in the dwelling of the wise; but a foolish man spendeth it all.” Proverbs 21:20

Luckily, I learned the value of this scripture in Proverbs while still in my 20's. It became my battle-cry for change. Living paycheck to paycheck was stressful and always made me feel like I was failing. I didn't put it all together until I realized what I thought was budgeting, really wasn't. Having a bit of money left at the end of the month is just luck, not a budget. A Budget is deliberately telling your money where to go. This means setting limits on how much you spend in certain categories (like eating out or fun activities) to make sure you can hit your goals. On the flip side, it also gives you permission to spend in areas that would previously cause stress. Clothing was this way for me. We would go a couple of months without buying anything and then all of sudden spent $100 or more. It always killed me. 

So where do you get started if you are sick and tired of this frustration? 

1~ There is no such thing as a perfect budget. It changes month to month and most of the time during the course of a month. 

2~ A budget is month specific- This month's income vs. expenses. You don't plan for the average of your utility bill. You plan for what it is that month. 

3~ Use cash for everyday expenses and categories that you have a hard time controlling. This is my secret budgeting weapon because it's simple. When the envelope is empty you stop spending until the next month or pay period. This is where creative meals with leftovers turns into a character building moment. I only have 4 cash categories- Groceries, Clothing, Eating out, and Baby. If you are leery of carrying cash, only get out what you need for that week or pay period. Over time it will get easier.

4~ If you are married, both of you need to give input AND agree on the budget. Nothing is worse for a marriage than for one partner to feel like the other came down from Mount Sinai with the budget on stone tablets. This also means that if you need to adjust something, you agree to change it together. No, this does not mean after the fact saying, "By the way, there was a really great sale on [fill in the blank]. I just had to get them even though we didn't have anything left in that category." If you are having trouble getting on the same page financially with your spouse, take some time to dream together. Something like, "You know, someday I really want to be able to visit..." or "Wouldn't you love to drive a... someday?" Or my personal favorite, "I can't wait to be able to just give crazy amounts of money to people in need!" Find that common ground and make that your "why". 

"If you have a strong enough why, you can get through almost any how."

I heard this quote earlier this week and knew I had to include it. The why is your motivation to keep going. Another great idea is to post pictures around your house to remind you why you are sacrificing X and Y now, to have Z later. If this doesn't work, you have more serious marriage problems that need to be addressed with a trained therapist or counselor. Trust me, we've been there and it will help.

5~ Once your budget is established and you are out of debt, use that extra money to invest. Even as little as $100/month can make all the difference. We're literally talking weekly pizza or latte money here.

Taking control of your money is hard. While paying off debt and learning to save is hard, it's a lot harder to be facing retirement trying to figure out how to live off of Social Security. So please stop eating your retirement! It makes for some awfully expensive poop down the road.

Living Within Your Means

I am often asked what the #1 thing you can do to improve your finances. After thinking about it, the first thing that comes to mind is to live within your means. Not doing so is the root cause of much of the financial stress and heartache we go through. It can be really really hard to live within your means, but that doesn't negate the need for it. So to start off a new year I want to talk about how we can all do this better this year.
What does living within your means actually mean? Obviously, it means not spending more than you earn, but I want to take it a step further to include living on less than you earn. The goal shouldn't just be to live on the cusp of your income because at the end of the month, you'd have nothing to show for it. A good rule of thumb is to live on 80% or less of your income. This allows you to give 10% and save 10%. Some of you might be thinking right about now, "How am I supposed to do that? I can barely make it as it is." Chances are if this is the case, then you have been living on the edge or above your income for some time.
So here are some things you can start doing this month if you're in that boat.
1~Get organized. Read this for more specifics of getting organized. Financially speaking, it's a great place to start because a little organization goes a long way.
2~ Create a Budget. If you've never had a budget or let it slip in recent months, then do one today. Start with your income. No matter how much or little you make, the principles are the same. It needs to be month specific and realistic. Cover your four walls first (read this for details). Then debt payments, and/or savings & giving goals. Be sure to include non-monthly expenses because they can wreck your best laid plans. Remember there are only two sides of the equation- Income and Outgo. If something comes up, make adjustments.
3~Clean House. This might be literal if you're coming up short and need to sell some stuff or are looking for a part time job. Most likely there will be some categories you need to thin out to bridge the gap. This may include drastic cuts like selling a car or house that you're struggling to pay for. At the very least there will be little things that add up quickly, like buying a drink at the gas station or daily lunches. Maybe it even means trimming utilities and grocery bills by lowering energy usage and better menu planning to avoid eating out and impulse purchases. No matter the category, short term sacrifice is always worth long term gains.
4~Learn to just say no (to yourself and your kids). Children can be one of the biggest reasons for getting off track financially. Part of being a good parent is teaching your children that the world does not revolve around their wants. Even if you did have loads of extra money, do you really want to raise those kind of kids? Likewise, adults can behave like children by "needing" things too. Be realistic and remember that family needs and goals come first.
No matter where you are in your financial journey living within your means should be one of your top priorities.

Just a Reminder About Tax Day

With April 15th just around the corner, about half the country is preparing for and anticipating a large return. How large? The average so far this year is estimated at just over $3000. That comes out to $250/month. That's a lot of money that could otherwise be working for you and your goals every month. So how does this happen year after year? Think about it for a minute. Why would you want to purposely loan your hard earned money (interest free no less) to an entity as pathetically inefficient as the US Government? It makes no sense. Don't get me wrong, it's great to receive a large lump sum. The problem is many see it as free money to splurge and spend on things they want. Instead you should remember it's your money that you overpaid in the first place. I would suggest people do this for a few reasons: out of habit, a lack of knowledge and/or lack of financial discipline.
What should you do if you find yourself in this predicament? First find out why. If it is the first two reasons I listed then, it could be as simple as going to you HR manager and raise the number of withholdings on your W-4. I find the majority of people don't know how to accurately calculate right number for your situation. The IRS actually has a calculator online to help. Get started here. The simplified version is that the right number for you is calculated by several things including the number of dependents you claim, your tax bracket and how much you already withhold. Your tax adviser is also a wonderful resource to help you calculate this. Be sure to update this from year to year as your life changes.
If your reasoning is a lack of financial discipline or planning, then you have bigger problems. It's not a math problem, it's a behavior problem. Tell-tale signs include: using your tax return to bale you out of the debt created the rest of the year, failing to use the word 'no' often enough to you or your children, not working together with your spouse on financial goals, and not living within your means. All of these point to not having and/or following a budget. My warning if you find yourself in this group? Don't just fix the numbers unless and until you have the planning to back up what to do with that money as it comes to you throughout the year. Otherwise, you will have nothing to show for it and no large tax return coming. Remember, personal finance is neither perfect, nor constant. The trick is to keep reaching for your goals, even if you are derailed temporarily.

Caught in the Middle

I was talking to my neighbor yesterday about the delicate balancing act between paying off your home, saving for college and saving for retirement.  She posed the question that I'm sure you have asked yourself, "How do you do it all?"  It got me thinking about all of you who are caught in the middle between saving for yourself and your kids' future.  How do you plan?

There are a couple of things you need to take care of before you'll be ready to juggle these well.

1~ Be completely out of debt, except for the house

2~ Have 3-6 months of expenses in an emergency fund

Not having an emergency fund or having debt payments detract and distract you from your savings goals.  It's a lot harder to juggle 4 or 5 balls than it is to juggle 3.  You end up feeling spread too thin and discouraged.  It's easier to tackle one thing at a time.  If you have a pile of debt, it's hard to save for anything, period.  The last thing you want to do is to borrow from your retirement or kids' college fund to cover an emergency.  If this sounds really simple and unsophisticated, it is.  But once you are out of debt and have that emergency fund, you have two less things pulling you away from your goals.  Remember, there is great power in focus.

Once you are focused, it becomes a question of priority.  Ideally, you do it all at once- retirement, college, and pay off the house early.  But if you have to choose, put your retirement first.  This will always trump saving for anything else.  It's like the reminder we get when we fly, about the oxygen mask; always secure yours first before helping others.  After retirement is taken care of and depending on what phase of life you're in will determine if you're more aggressive with college, the house or other goals.

One last note on college savings.  If you do have the resources and desire to also save for college, set limits.  Decide what you can and are willing to pay for.  Let your kids know early and often that they will be expected to work hard to get scholarships and get a job while in school.  You may choose to limit the funds to pay for an in-state college or university instead of a costly private school.  Remember, companies hire more based on experience, work ethic, and attitude than they do from where you went to school.  Besides, who wants to raise pampered trust fund babies? I don't, and I wouldn't no matter how much money we had.  Looking back on my own college experience; the lessons of discipline, hard work and seeing something through to the end were just as important as the content itself.

Budgeting: Stay on Target Month After Month

Have you ever had a month or even a series of months where things are just off when it comes to your budget?  I know I have.  Life happens, things come up that threaten to tip your balancing skills.  Maybe you've just lost the patience or the drive to keep going when the light at the end of the tunnel seems so far away.  If you're like me you need a tune up once in a while to keep moving forward.  So what should you do to stay on top of your game when budgeting becomes mundane?  

1~ Breathe.  Recognize that life happens, a lot sometimes.  Even when you feel like you've been knocked to your knees, it's important to take a deep breath before continuing.  No matter what you're going through, it will not last forever.  It might not seem like it now, but if you keep pushing you will eventually break through to the other side.  Don't let life's detours make you quit.  Instead, enjoy the windy path along the way.

2~ Remind yourself of the big picture.  Accomplishing your financial goals is a marathon, not a sprint.  Big goals, like getting out of debt, saving for a house, kids college, or retirement happens one day, one step at a time.  Taking the time to remember where you are headed and why will give you an extra pep in your step.

3~Don't get distracted by your wants.  Sure you can throw in wants sometimes to spice things up, but don't make it a habit or you'll lose momentum.  This is another reason why it's so important to have a blow category in your budget.  It needs to be enough that you can blow off steam, but not so much that it derails your goal efforts.  

4~Make it a game.  When my husband and I were getting out of debt, we made it a game to see how much extra we could glean to put towards a bill.  As a result there were months where we made a double, triple, or even quadruple car payments or student loans.  It becomes addictive almost and feels great to see the progress you are making.  We are doing the same thing now that we are saving for a down payment for a new home.

5~Put daily reminders around the house, car, work to help you remember.  Maybe it's a picture of what you are trying to do.  I always encourage my clients to do this because a visual reminder helps a lot when you feel bogged down.

6~ Remember to always budget for those non-monthly expenses.  They can quickly become budget busters and also throw you off track.  Here's my post about that from last year.

With rare exception, change happens gradually, not overnight.  It only happens when the pain of staying the same is greater than the pain of change.  If you keep these 6 steps in mind, the mundane will be revitalized again and you will see that change over time.

January Budget Doldrums

Now that we are 3 weeks into the new year, I'm sure if you made a resolution to do better with your money, your enthusiasm is starting to wain.  Have no fear!  I'm here for a mid-month pep talk.  First of all, remember a couple of things.  Change doesn't happen overnight and it's the little things that add up to be big.  Start by taking baby steps.  You can get anywhere by taking baby steps, right?  So here's a few steps you can follow if you're new to the game. 

1~ Lay out your entire budget- Income vs. Expenses.  Let it all hang out, flab and all.  This won't be pretty but you need to know what you spend on everything from debt payments to gas and groceries.  Don't forget little things like activities for the kids, lunches, and pet supplies.  Chances are you're going to feel anxious and overwhelmed by this, especially if what goes out is more than what comes in.  

2~ Cut it in half.  If doing an entire month is too much, start with a pay period instead.  This is a great way to break things off into bite sized pieces.  This is what I do and it's become super easy.

3~ Remember your four walls ALWAYS come first.  Read here for more about that.  These big pieces always go into place first so you don't have to worry about what you're going to eat, or if the electricity is going to be shut off.

4~ Choose one area that you want to change right now.  Maybe you'll start using cash for everyday expenses instead of credit or debit cards.  Maybe it's cutting back on dining out.   Maybe you need to shop around for insurance because it's been a while since you've looked.  Maybe it's even as simple as menu planning to save on your impulse grocery spending.  Regardless, find something that you can start today.  Once you've mastered that one thing, choose another.

5~ Remember to take one day at a time.  There's nothing more discouraging than feeling like you're stuck.  Taking baby steps one day at a time helps.  Life is never perfect and neither is budgeting.  But if you keep at it, you will achieve your goals.

Spending Triggers

Do you use money at a stress reliever?
Do you cave to the pressure or obligations put on you by family or friends with vacations or gifts?
Do you, your spouse or children throw a fit sometimes because you want it now?
Do certain times of year cause you to spend more?

All of these situations can be triggers for spending money you either don't have or haven't planned for.  These are all really difficult things to overcome.  We all fall prey to them at times so balance is key.  If we allow ourselves to justify them, then little by little we can find ourselves far away from where we thought we would be. So here are some things I want you to put in place to prevent giving in to these triggers.

1~ If you use credit cards, STOP IT! Lock them up, delete them from your online shopping sites or cut them up if you have to. All too often they become a crutch to fall back on when you're really stressed and in the heat of the moment need to go shopping. Find a new way of coping with your stress, exercise, talk to a friend, read a book.  Trying to heal matters of the heart with money never works and just causes more pain in the long run.

2~ Stop abusing your debit card. If you don't use credit cards you might abuse your debit card by telling yourself that you'll just transfer money from savings to cover it.  This will constantly cause you to lose the traction you're trying to gain.  Cash, on the other hand, causes you to pause before buying something and once it's gone, it's gone.  You just have to be careful not to go by the ATM for more or you'll be right back where you started.

3~ Talk with your family or friends. Share your goals with them. Tell them you can't do certain things as often with them anymore because you are choosing to use the money to accomplish your goals.  This isn't very pleasant at times but by and large most people understand.

4~ Be realistic in your budgeting for vacations, activities and other discretionary spending.  Let's face it, Summer is a very demanding time of year for our budgets.  Next to Christmas it probably does the most damage.  A counselor friend of mine recommended having an emergency fund for your vacation to catch any unplanned things like car repairs, higher gas prices than anticipated and splurges on food and gifts.  Bottom line- things always end up costing more than you think, so plan for it.

Making these changes requires you to get back in the driver's seat with your money again.  No more autopilot, ostrich head in the sand, or plug your ears and sing mentality.  If you want change to happen then you can't keep doing the same old things.  Above all, be honest with yourself!  This is probably the most important because if you truly are, then everything else will fall into place.

My Expanded Thoughts on Progress

Yesterday I came across a C.S. Lewis quote that struck a chord with me. "Progress means getting nearer to the place you want to be. And if you have taken a wrong turn, then to go forward does not get you any nearer. If you are on the wrong road, progress means doing an about-turn and walking back to the right road; and in that case the man who turns back soonest is the most progressive man." While this quote is from his book Mere Christianity and is referencing a more spiritual note, I found it also to apply to the world of personal finance. I could not stop thinking about it and had to expand my thoughts on the subject.

Do you ever feel like you're stuck spinning your wheels in the mud when it comes to your finances? I know I have many a time. Especially lately as my husband and I have been trying to rebuild our emergency savings from the substantial hit it took earlier this year. While I know we are on the 'right road' because we have been making progress towards our goal, it has ended up being a lot slower than originally anticipated. And that has caused frustration. I'm constantly reminding myself that there are no perfect months for a budget and that adjusting your expectations can be really hard sometimes.

There is a delicate balance between being flexible with your budget and completely blowing it. In the world we live in there are so many ways we can get pulled off the road that leads to our financial goals. Family, friends, children, neighbors, advertisers all have a tremendous pull on our budgets trying to lure us away from putting extra money into debt payments or savings. Those other roads are sometimes bigger and have bright neon flashing signs promising fun and happiness for all. At the end of the day when the money is spent, you're left with nothing but the figurative hangover wondering why you did that. We then can become discouraged and give up on our goal altogether. Instead of doing that I want you to stop and think about where you're at right now. Go back to the basics and start again. Even if it's not the beginning of the month. Be realistic and honest with yourself. Recognize your triggers for choosing that path. It's easy to tell yourself Yes rather than NO. But if you tell yourself 'no' or 'not right now' long enough it becomes easier. Getting and staying on the path that leads to your goals is a struggle. Changing direction is really hard to do but worth it when you actually see the progress you are making.

Common Budget Busters

I know I've said it before and I'm sure I'll say it again but if you don't have a month specific budget to tell your money where to go, you will ALWAYS wonder where your money went; or you'll get frustrated because it doesn't work and throw in the towel.  It's been a while since I've talked about budgeting so I want to talk about some common areas that we forget about and tend to bust the budget month after month.  Setting a monthly budget should not be a stressful, gut-wrenching experience month after month.  It may be at first, if you have never had one or you're starting from scratch.  You may even be a bored free-spirit who doesn't get a rush over a balanced checkbook like the average nerd does.  The only way for it to get easier is to keep doing it, build confidence in yourself and your ability.

Non-monthly expenses are perhaps the biggest budget busters out there.  You know what I'm talking about, the "we forgot that the car needs maintenance" moment we've all had; or forgetting that when the kids go back to school they need new clothes, Christmas is in December, and of course the medical deductible starts over again at the beginning of the year.  So how do you stop from going crazy by these things that seem to creep up on us?  Go through your expenses and figure out which ones are non-monthly expenses.  This is everything that occurs either erratically or in regular intervals, just not every month.  Create a sinking fund for those categories by putting money into an envelope or savings account every month to cover when those categories hit.  Simply find a monthly average that you spend in each category.  This is particularly helpful with car repairs & registration, back to school, Christmas, and vacations.  If you're not in a position to be able to cash-flow it, then you need a sinking fund.  For smaller incidentals, have a miscellaneous category in your monthly budget.    If it creates a problem for you every month, then you're not budgeting for it properly.  Make it part of your monthly expenses.  I see this happen a lot with little things like gifts, or clothing.  But people get into trouble with big things like insurance deductibles.  

Above all, KEEP GOING!  Changing the way you handle money is super hard stuff and takes lots of the 3 P's, practice, patience and perseverance.  It also requires you tell yourself, your children or your friends "no" or "not right now".  If mid-month you're thrown a curve ball, roll with it and make adjustments.  Burying your head into the sand out of fear or frustration will get you nowhere.  You're only defeated when you decide not to get up and fight one more time.

Tip of the Week January 7-14

Back to Basics!

This time of year is filled with lofty goal setting and getting out of debt usually tops the list. Of course this rarely just happens. And so I want you to think of this from a different approach. It's the simple little things that make up the fabric life is made of. The small choices we make everyday that determine the course your life takes. In the world of finance I think it's best known as 'the latte effect'. A few dollars here and there that make a big difference over the long haul. Making small and simple changes now, on a daily basis does the same thing. So let's get back to the basics and focus on those small things that really do make a difference in your financial lives.

Homework:
Choose one area of your finances or budget that could use some extra attention. What is the category that is always out of control or throwing you off? What is your weak spot or chink that if left unchecked will unbalance the whole thing? We've all got one! You probably know exactly what I'm talking about, so it's time to fess up. Regarding this one habit or issue, identify what you can do to change it. This might be something drastic or simple tweaking. The point is that you do something to address the situation. We all know the power of denial. So stop and take stock of what you need. Be realistic and specific and if you slip up, don't quit!

Get Yourself Organized

When it comes to tackling your financial problems the first step in becoming successful is getting organized.  No amount of money or income potential will ever be a substitute for basic financial organization.  There are many options to choose, from software to websites, spreadsheets to just a legal pad.  Whatever your method of choice, the important thing is that it works for you.


If you are struggling in this area or your system consistently fails you, then you may need a change.  The key is to find something that meets your needs, you are comfortable with, and that helps you reach your goals.  Also, make sure you have a system to organize and pay incoming bills on time to avoid late fees and bank overdraft charges.  This is a huge problem for many and a very large source of revenue for banks and credit card companies.  In this case your time and preparation really is worth money.  So make sure you always make time for this vital task.


So here are some of the most available and widely used software and website options.  The most widely used software program is Quicken.  Although I personally don't prefer it, many people enjoy using it to track everything from small business income & expenses to investments and personal budget expenditures.  You can also sync it with your accounts to automatically download your info.  If you like the idea of that but don't want to pay for the software another good option is Mint.com.  It is a completely free website that has most the features as Quicken.  In fact it's owned by Quicken.  It automatically updates your expenses directly from your banks and other financial institutions.  It also allows you to track these expenses, set a budget, and see the overall trends of your spending.  I recently started using this and while I like how well it tracks income and expenses and gives you a good overall picture of your finances; I am not impressed with the budget capabilities and lack of cash-flow projecting.  You have to wait for a bill or expense to actually hit your account before it's on the radar and for me that's too late.  This is why I have used for several years and still prefer Microsoft Money.  I love the way you can set up your month-specific budget, project cash-flow for the pay period and track expenses by category.  Unfortunately, Microsoft discontinued Money and all related software in the Summer of 2009.


If budgeting software or online tracking is not up your alley, you might prefer a simple spreadsheet in Excel or Google docs.  Combined with bill pay with your bank or credit union this can be a very effective yet simple way to keep track of your budget.  If you are really old school you might prefer to use a simple legal pad or ledger.  Whatever your method of choice remember, if it works for you and meets your needs stick with it.

The Four Walls

When it comes to personal finance this is the most basic of principles that also has biblical roots.  I've briefly talked about this in the past, but let me give a more thorough introduction to The Four Walls principle.  No matter what circumstances you find yourselves in you ALWAYS maintain your four walls (aka your household)- Food, Shelter, Clothing, Transportation, and Utilities before you do anything else including paying down debt and saving for retirement or anything else.  Often times taking care of these basic necessities is second nature and well within reach.  There are times after a job loss, income reduction, major medical event, death or divorce when even meeting the basics can be difficult.
So what exactly do the basics entail?  Even in these categories there is wide variance with what you actually need and what you have or want.  Food is the most important basic need in sustaining life.  It is the first thing that needs to be taken care of.  I'm not talking about eating out for every meal, buying filet mignon, caviar, and bottled water at the grocery store, or expensive personal care items.  I'm talking basic food staples and personal hygiene products.  Things may be bad enough that you can't afford to eat out at all and you may even need temporary assistance from a church or food bank.  These measures are temporary for a few months or a year but are not a permanent way of life.  Like food, clothing is another basic need.  Obviously this doesn't entail designer jeans and handbags or fancy sneakers.  You may need to shop consignment or thrift stores to meet this basic need.
Shelter, the roof over your head, whether it be an apartment or home that you can afford.  If you have ever been house poor, you know what this feels like.  A good rule of thumb is that you spend no more than 25-30% of your take home pay on shelter.  Anything much more than this is unsustainable long term and puts you at risk of facing foreclosure or eviction.  As hard as it may be, you may have to sell your home, on a short sale if necessary and move somewhere else. This is much better than having the house taken from you later.  Sadly, I have seen families lose nearly everything by trying to stay in a house they cannot afford.
Transportation and utilities are other needs that have a wide range in cost.  Again this boils down to the basics.  Am I starting to sound like a broken record yet?  Unless you use mass transit, you need a vehicle to get to work and back.  Trying to hold on to a car that you can't afford the payment, gas, insurance or maintenance on is stressful and not worth it.  If you need a truck or vehicle that can tow a trailer for work, that doesn't mean you need a brand new one.  When it comes to utilities you need electricity, heat, water and a phone.  Contrary to what your teenager or spouse might think this does not mean a premium $100 cable or satellite package and a $200 cell phone plan with unlimited everything.  The high speed internet might have to go for a while if necessary.  More hard changes may be necessary to keep your family afloat, but they will be temporary.  Obviously I have listed some worst case scenarios.  Above all, when push comes to shove you may need to trim some of these categories.  Whether you are facing a crisis or trying to find money to pay down debt and save, you are the one in charge and must decide what to sacrifice.  What's important to remember is to hold on to what really matters, your spouse and family.  Stuff is just stuff and you can always get another house or car, but your family is irreplaceable.

Having a Plan for Holiday Spending

One of the 7 principles of money that I teach is that if you want to be successful with your money you have to learn to live on less than you make.  Now this doesn't mean that this applies to you only 10 months of the year and during the holidays it's a free for all.  It seems to be the same story every year.  We fail to plan for the expenses associated with the holidays and are surprised every year when Christmas still comes in December.  Then we don't pay for it until the tax return comes.  There really must be something in the air this time of year that causes a disconnect between your brain and your wallet.  Did you know that Americans spent nearly 16 billion dollars on holiday spending in 2009 and that was only in November and the first week of December?  And that was up from the year before.  If you are tired of this yearly cycle, here's what I suggest to break it.


1. Be realistic about how much you can and want to spend.  No matter what your income or situation, you have to set a budget.  This includes budgeting for more than gifts.  Decorations, parties, extra food, increased utility costs from lights and guests, and transportation costs often get forgotten and aren't budgeted for properly.
2.  Spend only actual money, whether in the store or online.  If you don't have the money in cash or in your account, don't buy it!  No matter how much it's on sale or you may want it.  If it's not in the plan, you don't get it.  This will make you prioritize not only how much you spend but what you buy with that money.  Plus, not having a massive credit card bill looming in January will make the season all the more enjoyable.
3.  Do a gift exchange.  Instead of buying gifts for every member of your family or extended family, draw or rotate names year to year.  My own family has been doing this for many years and it's worked very well.  Only having to buy one gift simplifies things immensely.
4.  Be honest with your family and friends.  Tell them this is the year that you are breaking the cycle and aren't spending what you've spent in the past.
5.  Prepare for next year.  Christmas is obviously a non-monthly expense.  As such, you can start in January to accumulate money every month into a Christmas fund.  Divide the amount you are planning on spending by 12 and put that much aside every month.  By the time next Christmas comes you will have the money needed to pay for everything.  This is very simple to do, but takes planning ahead and being intentional.

Unplanned Expenses

It's that time of year again- back to school!  It seems like every week the kids are bringing home unexpected or forgotten fees related to school.  If while planning out your budget for the month you forgot to include room for things like this, you may be tempted to throw your budget out the window and give up.  Resist this urge to give up, because until you are practiced enough to remember all those little budget gotchas, you'll have to reshuffle things a bit.  If you don't have the money in an assigned category you'll have to borrow money from a few different categories to make up the difference.  This is of course an emergency stop gap, not a way of life.     


I have suggested in the past, especially when you are new to trying your hand at budgeting, to make sure you include a miscellaneous category in your budget.  The point of this category is to catch any small unplanned things that come up during the month- gifts, activities, fees.  This is usually $15-$50/month depending on your needs and your income.  Any amount more than this, in my opinion needs to be given to a specific category.  Whether you keep this money in cash building up in an envelope or put it into your non-monthly expense savings account, make sure you assign it somewhere so it doesn't get lost with your other money.  As you get your budget more fine tuned the need for this category will diminish because you will assign the money to more specific categories.  


You might be asking, "well, this is all good and fine, but what do I do if I have an expense come up that is more than my miscellaneous budget?"  Sometimes this happens and at that point you need to assess the situation.  If it's a considerable amount of money, like an unexpected car repair or something like that, then it may be necessary to tap into your emergency fund if you can't cash-flow the expense until payday.  If it's not a true emergency then borrow from other categories like I've already mentioned and put into practice a method to avoid that next time.  A good idea if you have school-aged children is to start a school category in your budget.  This would include school lunches, fees, field trips and anything else related to school.  Any unused money would roll over to the next month.  I know these are really simple steps to take but they make a huge difference in the long run and will save you that last minute headache of scrambling for the money.

Recipe For Becoming Financially Exceptional

Today I am addressing those of you who feel you live comfortably.  You make a pretty decent average or above average income (the average income in the US is ~49K/year).  You are probably fairly typical by having a car payment, and a student loan from your college days.  You probably use your credit cards faithfully for the bonus skymiles or reward points, but may or may not pay the balance off at the end of the month.  Also, you may have never had the need to learn how to budget because of your income or simply don't bother to because it's too menial or you don't think you have time.  I run into you a lot and hear, "Oh we think it's great what you do, but we aren't struggling, so we don't need your help."  Granted you may not come out and say it like that but that's the basic drift of how the conversation goes.  If I am describing you please stop and take a listen to what you inner voice is telling you.  


Answer these questions honestly:
Are you tired of feeling like you have nothing to show for the money you make?  
Do you dread paying the bills because there is little or nothing left afterwards?  
Does thinking about retirement or the kids college make you sick or keep you up at night because you know you aren't saving enough?
Do you disagree with your spouse about how the money should be given, saved or spent?


If you answered yes to any of these questions, this is your wake up call!  You are the perfect candidate for what I do and teach regardless of how much you make or how well off you think you are.  Well perfect that is, if you have the desire for change and achieving a better life and future.  You are my favorite kind of client.  I can take you from average to exceptional by making some small changes in how you manage your money because you have a good income.  So what are you waiting for?  Why settle for mediocrity when you can be truly exceptional?

The Irregular Income Earner

I have briefly mentioned this in a previous post a few months back (go here to read it) when I talked about budgeting in general.  Today, as per request, I want to go into more detail about budgeting when you have an irregular income.  As I've said earlier, it's actually more important for you to have a plan because your income can vary so widely.  Whether you are paid on commission or seasonally this post is for you.


So here's what I suggest.  Start by calculating the base income that you need to meet all you basic needs and minimum payments.  Then go over your last year of earnings.  What is the lowest amount you earned in a given month?  If this amount is lower than the minimum you need, start here.  I suggest having a savings account specifically for the 'hills and valleys' you see in any given year.  This is separate from your emergency fund.  Consider it a reserve account for those months you don't make enough.  On months that you make more than enough, you would replace money that was taken out in a previous month. 


You might be thinking,  what do I do if I have several low months in a row and my account runs dry?  In this case, you have two choices.  You can find another source to boost your income or you can reduce your outgo.  If you find yourself still with not enough, be sure to remember the four walls principle.  Prioritize food, housing, utilities and transportation- the basics.  You might face the reality that not everyone will get paid.  Draw a line where the money runs out that month because that's all that you can do.  Obviously, this is a temporary measure because you could never go on like this indefinitely.  If things get that bad, you need to solve your income crisis.  No amount of budgeting will make up for a lack of income.  There's only so much you can sell or cut back on.  You'll certainly need to make a plan for the short term, but long term you'll need to plan for what you want to do with your life.  Does this involve further training or schooling of some sort?  Make a plan and do it.


Now let's look at the times of plenty.  The natural tendency is to get sloppy during these times.  These are the times to build that reserve account and pay down debt aggressively.  Don't fall into the 'we need it' or 'we deserve it' mentality.  I'm reminded of the story of Joseph and The Pharaoh of Egypt in the Old Testament.  Remember there were 7 years of plenty before there were 7 years of famine.  Egypt was the only nation prepared and were able to share with their neighbors because of it.  Preparation is key, especially if you have an irregular income.  It can be a  little more challenging, but it is doable.  Neither good times nor hard times last forever.  Chances are you will experience both many times throughout your life.

The Envelope System

I know I have mentioned this when I talked about budgeting.  Please go here to read what I said about how cash will really works in your favor.  You also know, if you read my ramblings how passionate I am about this system.  This concept really is so old school, but it works!  As you've read, I recommend using cash for everyday purchases.  In my tip of the week I challenged you to use this system for 3 months.  So let's talk about it.


There are certain categories in a budget that just make more sense to use cash for.  These include but are not limited to: groceries, eating out, entertainment, clothing & blow money.  The question often arises, how much do I put in the envelopes?  The answer to that question depends on many things; family size, income level, and amount of debt you have.  For groceries I would recommend somewhere in the range of 5-15% of your take home pay.  This range applies mainly if you are not on the extreme low or high ends of the income spectrum.  If you net $10,000/ year you need may more than $125/ month for groceries, especially if you have a family.  Likewise, if you net $500,000/ year you wouldn't need to spend over $2000/ month on groceries.  But for the average income in this country of $48,000/year this range works well.


Now let's talk about eating out/ entertainment.  Did you know that in general there is an inverse relationship between one's consumption and one's net worth?  That's right, the more you consume (spend), the less you have to save.  What I tell my clients is to look at the overall picture.  How much debt needs to be paid off?  What do they want for the future?  How badly do they want to get out of debt and change their lives?  This category isn't a necessity to have.  It's for fun and enjoyment.  Yet some of us have been so lopsided by spending too much in this category that we've made a real mess of things.  Going cold-turkey is not the answer either for most people, unless you are in very dire straits.  Some entertainment isn't a bad thing, but you really have to decide what you are willing to sacrifice to achieve your goals.


While clothing is a basic need that should be covered, this doesn't mean you have to buy the most expensive brand name clothing at full retail price.  Nor does it mean you must limit yourselves to buying only from the thrift store.  If you have children they would obviously need clothing more often than adults, simply because they are still growing.  For an amount in this category, I say, be reasonable in what your family needs, and shop for bargains. They are out there, both at the mall or the consignment store.


My last category that you may or may not use cash for is blow money.  I personally don't use cash for this but many do.  My husband and I have our own little checking accounts for this money.  We typically use our blow money for things that we buy online for ourselves or just use our debit cards in a store.  The important thing to remember is that the money is finite and isn't in your general checking account.  As far as an amount, again it really depends on how much you really need to not feel completely out of gas. For some this might be $20/week, for others this might be $20/month.  You really need to take into consideration your circumstances and personality.  I personally take much less than my husband, because I'm a natural saver and I'm perfectly okay with this. As I've said before this money is to give you breathing room to do what you like in your budget.  It's the grease that keeps thing moving. DO NOT, under any circumstances completely eliminate this category.  Even if you only get a few dollars a week to buy a soda at work, you need this category.


As you go forward in figuring out what other categories you may need an envelope for, please remember to keep things simple.  You wouldn't want to have 15 envelopes to keep track of,  3-5 categories usually will do the trick.

Tax Returns

Ah...spring is in the air, the birds are chirping, the flowers are blooming and of course people are pulling out what hair they have left trying to get their taxes done.  Nothing like the last minute procrastinators rushing to the post office to send off their tax returns.  I know my quotes this week are more funny and sarcastic than thoughtful but I couldn't resist because it's true.  Taxes really are the bane of most people's existence.  The tax laws in this country get more convoluted every year trying to squeeze more and more out of the working people.  But this post isn't about the injustice of the current tax system, it's about the tax return.


This time of year is either the most dreaded or the most loved depending on how much the government decided to take or give to you.  If you are among the hard working, self-employed, then I feel your pain.  For you, there's not much you can do for this except vote!  This post is  addressed to those if you who are not in that group and have a regular job with w-2's.  You know who you are.  When you started work, you filled out a W-4 that tells your employer how much to take out of your paycheck and give to the government in taxes.  This form is vague and many people don't know what number of exemptions to put down.  The number that's right for you varies depending on your situation.  Quite often the guidelines on the form to figure the exemptions come out too low.  This is especially true if you are a one income household and have children.  


The bottom line is this: if you are over withholding your taxes simply to 'save money' and get a large refund STOP!  As I said in the tip of the week, this is probably the one area that I have never heard disagreement in the world of financial advice.  Here's what usually happens when you get your big fat tax return.  You try to act responsibly and put some into savings or pay down the last of the Christmas bills or other debt that has accumulated throughout the year.  But more often than not, the money just burns a hole in our pockets and we end up buying some big thing or going on a fabulous vacation.  Either way, the money is gone and you still aren't any better off. 


The most common excuses for this practice are 'I can't save money otherwise' and 'we use the money to pay down debt, so that's good'.  Let's start with this business of not being able to save money.  If you do what I'm telling you to do you will have more money coming home every paycheck.  If you still don't trust yourself, then set up a savings account and have the money that would come home sent directly into the savings account.  Out of sight out of mind.  If nothing else, at the end of the year you would have your own 'tax return' and the interest accrued on top of that.  If you want to make even more on that money than just simple interest in a savings account try this: use that extra money every month to go toward your debt.  The interest you would save far outweighs the savings account interest.  This is my preferred method but doesn't just happen automatically.  It requires you to take an even bigger step and become intentional with your money.  If you don't have a plan for that extra money, it will get blown on whatever looks good that week.  


If you are using the money to pay down debt, then try this on for size.  Try using the extra money every month to pay down debt or at the very least, to avoid the need for the debt in the first place.  You'll see progress throughout the year and build confidence in your ability to take control of your money.  Yet another reason to have a plan every month for your money (aka a budget).  If you are still having trouble swallowing this advice, I would ask you to think about it and try it out for a year.  You can always go back to loaning the government money if you don't like it.

Create a Budget that WORKS!

I want to introduce you to the zero-based budget. It's a basic concept that says income minus out-go equals zero. Now I know some of you are thinking this sounds fishy. This doesn't mean you actually spend every penny you bring in. It means you assign every dollar a name. Whether it's going into savings or being spent out on the town, every dollar has it's place. When there is money just sitting there with no purpose, guess what happens? It leaves- via the pizza delivery man or the mega-store of your choice. This is why you will always be broke if you don't have a plan. Now obviously, it takes a little effort and planning to be this intentional with your money. But a funny thing will happen when you do this, you'll feel like you got a raise.
As I mentioned in the previous post, the pit falls of budget making and how to avoid them.  I want to go into more specific detail on a few things.  First, irregular income earners.  If your income varies widely from month to month or seasonally then you need a budget more than ever. Here's how you do it.  Again start with your four walls and make a list of all the things you need and want to spend money on this month.  Write down as many things as you can think of.  Then, number the list by priority.  Work your way down the list until the money runs out.  By doing this you know exactly what to do with the extra money that comes in and the money isn't wasted on, "let's go to dinner since I got a bonus."  This is not to say that you will never go out to dinner.   I am saying that there will be a limit and it won't be just because magic money appeared in your account.
This goes right into the next thing I wanted to talk about, categories that should be always be included in your budget.  In the beginning you must have a miscellaneous category to cover any little things that come up during the month.  As your budget gets more fine tuned then this category won't be as important because you will have learned to account for those little things.  Another category you should always have is a blow category.  This is for exactly what it says, to have a little money to blow on whatever you want.  Visit the vending machine at work, buy a couple of movie tickets or a pizza once in while.  Or you could buy games like my husband does.  This is especially important to have in order to release steam.  Remember, the first 3 months will probably be a mess, but it will get better.