Well as a nation, we have temporarily avoided the national Fiscal Cliff. But it clearly seems as a nation we are spreading ourselves way too thin. I'm no politician and I don't consider myself among the elitists of knowledge, but I do know that you don't make a budget to spend more than you will make.
Like every other American, my household is suffering the woes of no pay raises in 2013, an increase in our taxes and an increase in the cost for health benefits (with a decrease in services, of course). So now it is time to step back and assess our income, understand where we spend money and work out a budget. But nobody like budgeting - it's so difficult and cumbersome and depressing. But it doesn't have to be. This is by far the easiest budget you will ever do.
Perhaps before we talk about budgets, we should discuss the Fiscal Cliff situation? Perhaps you are still trying to understand what the Fiscal Cliff really is and how to understand it. There are several diagrams and graphs floating around the web to try and define the Fiscal Cliff in more pedestrian terms. Here are two I've seen that I think sum it up fairly well:
But perhaps these diagrams are still a bit complex to understand with the GDP and percentages of income tax increases and the billions and trillions of dollars. To make it even more simple, this explanation has been popping up all over the Internet as well and breaks down the Fiscal Cliff dilemma very well in a way that most anyone can understand:
In the most simplistic terms, we are spending more than we make and we have been for years putting more and more expenses on our national "credit card". But every credit card has a limit and we are on the verge of hitting ours. Had we "gone over the cliff", the average middle class family could have expected to see a $200-$3500 tax increase annually with multiple economic impacts including cuts with unemployment and Medicaid and Medicare. Basically it would have sent the US into a recession which was estimated to send unemployment near 10% (if not higher) with a multitude of economic and societal impacts.
Considering the potential financial dangers, it makes one think hard about financial security to provide not only for one's self but also one's family. I know that is why my wife and I put our heads together to try to proactively and aggressively control our money and our "exposure points".
First, lets talk about budgets. My wife and I can't budget in the traditional sense for crap. We can't track every dollar and we can't balance every expense into 50 different categories. My guess is that we fall into the same category as everyone else. So here is the basic plan we used to put a workable plan into place that didn't require continual maintenance.
The average household thinks of a budget this way:
1. First, I pay my bills
2. Second, I have necessary needs (food, gas for my car, shoes, etc)
3. Third, I need some "fun money", otherwise, I will go crazy
4. Fourth, I'll save whatever is left over
This thought process is all backwards. The first priority should be stability for your family financially and then everything else. This is the way you should think:
1. I get paid first
2. Bills and essentials get paid second
3. everything else is gravy
The way I think about it is 15-60-25. Basically 15% goes to me (aka - the family), 60% goes to bills and essentials and 25% is gravy. The best part about this concept is that you can calculate a dollar amount for each paycheck you receive (this is especially easy if you have a fairly consistent paycheck, which most people do). And with the options with electronic banking, it is easy to establish multiple savings accounts or checking accounts and setting up automatic account transfers.
Here is an example: Lets say we make $400 a week, and we get paid every Friday. Do some quick math and I know my budget breakdown should be:
Weekly:
1. $60
2. $240
3. $100
Monthly (estimate 4 weeks)
1. $240
2. $960
3. $400
Annually (52 weeks)
1. $3,120
2. $12,480
3. $5,200
Obviously these numbers are not set in stone; the percentages can be adjusted based on the situation and needs. The key thing here is the determine what you want (or need) in your savings. What will you need 3 months from now? 1 year from now? 5 years from now? The wife and I actually set up 5 separate savings accounts: 1) Bean's college, 2) wife's retirement, 3) house repair fund - anticipating a new roof in about 5 years, 4) Car fund - for new car purchases and 5) a general savings account.
The trick is to think about your savings accounts as "non-negotiable". If you want to save $300 a month for a new car, then that number is non-negotiable. Everything else can be changed. Rent too high? Shop around for a new apartment. High electric bill? reduce your electronics or change our lift fixtures for low wattage bulbs or turn down/up the thermostat. Phone bill too high? Reduce your minutes or data package. Grocery bill too high? Shop sales or buy non-name brand. Need new shoes? Shop around for sales or use coupons. The point is that every bill you have can be manipulated in some way, shape or form. But your savings CANNOT and SHOULD NOT be negotiable.
Once you have your saving targets and goals established, set up automatic transfers. If necessary, open new savings accounts and/or checking accounts with your back (this can often times be done online - very, very simple). Then just set the parameters for the reoccurring transfers into the appropriate accounts on the routine basis you desire. As an example, I have some accounts that transfer weekly and some that occur monthly; each one functions with an automatic account transfer on specific days of the week/month. It took a little time to set up, but now, without even thinking about it or doing anything, money is automatically being saved in specific accounts for specific purposes the wife and I had previously decided. Typically I never even see the money - it drops into the savings account right after my paycheck clears. EXTREMELY low maintenance.
Once the wife and I had our "budget" in place, it was a matter of determining what cuts we could make. The trick here is to pick your battles - what are the "exposure points"? I'm not a big advocate of cutting all the small things in life - I'd rather target the few things that I typically don't see that are bleeding money out of my pockets. Things we considered and/or did:
1) Brown bag it - take a lunch to work. Make large meals for dinner in the evening or on the weekends and make sure you have leftovers that you can grab and go with in the morning. Even if you go for a $5 fast food meal each day 5 days a week, that's $25 a week totaling $100 a month and upwards of $1200 annually. That's a pretty big exposure point! (And most meals are not less than $5)
2) Look into your insurance policies - Changing your home owners insurance or car insurance could save you literally hundreds of dollars year over year. The wife did this for us about a year ago and between our car insurance and home owner's insurance, we saved about $700 a year and got better coverage.
3) Cable - There are a lot of options out there for streaming video over the Internet or there is good old antenna television. HD antennas are not very expensive these days are are very simple to install. We cut our cable TV saving us $60-$70 a month (estimated at upwards of $840 annually!). Alternatively we use Netflix, HuluPlus and various free internet sites. The nice thing about the online providers is that they are month to month and are very easy to simply cancel at any time.
4) Fight your taxes - Do your due diligence if you own property to appeal your property taxes if you feel they are too high. If you live in a complex, be active in the home owners association to have some input on what annual assessments will be required year over year. Living in one of the worst states in the US (ranked #47 out of 50 for worst run states according to the Wall Street Journal), magically our property assessment took a nose dive, yet our property taxes continued to increase. We did the research to appeal the assessment on our property to try and lower our property taxes.
5) Use coupons - I'm not advocating for extreme coupon-ing, but do look for discount prices and items on sale. Build your weekly meal menu from the sales items. And try to only shop once every week or bi-weekly. Studies have shown that people that shop more frequently throughout the week are more prone to impulse buy. Several stores are now incorporating a method of using your store account to track your coupons online, so you don't even have to bring the coupons with you to the store; they show up on your transaction as soon as the check-out attendant swipes your store card.
6) Don't cut the little things - If you have lunch with the crew from work once a week, don't just arbitrarily cut that out (unless it really is burning a hole in your pocket). If the price of lunch is minimal, then keep it. The things listed above will get you big bang for your buck. Denying yourself certain life pleasures just makes life a little more miserable. Just be practical and selective of when/where you go and how much you spend. Remember, we work to live not live to work - so live it up, just remain within your means.
7) Discount shopping - shop sales online and at the stores. Need new clothes? See what stores have sales going on. Shopping for your little one? Consider hitting up garage sales in the summer months on the weekend - great way to find clothes and toys for kids. The wife has stocked Bean's closet with name brand clothing, which she typically can purchase for less than $1 per article of clothing (pants, shirts, jackets, etc.)
8) If you use a credit card, get one with reward points - The wife and I purposely put expenses on our credit card and then pay off the balance at the end of the month. The perk here is that each dollar spent on the card can earn reward points, which can be cashed in for merchandise or gift cards. We are hoping that our reward points will be high enough that we can get cash back (or gift cards) to purchase supplies for our basement, which we are in the process of finishing.
These are a few of the things the wife and I are doing. The key thing here is that we are planning for our future. We prep and plan to save money for the priorities we set and ensure that money is going into separate accounts automatically so it is easy to manage and control. Then we adjust our lifestyle to live within our means. Unlike the national budget, we do not anticipate to spend more money this year than we make. And to avoid that potential risk in the future, we are ensuring we are stashing money away each month for future anticipated expenditures (e.g. - Bean's college fund, which won't be necessary for another 16 years). And even more importantly, the wife and I talk about it; we make sure we are on the same page with what is important. We do these things not just for ourselves, but for our son and those that will come after him. The biggest thing here is we as parents want to do our best to give our son a chance for a happy future. My wife and I are going to do our best to ensure he has a happy, healthy life full of opportunities. But as John F. Kennedy said, "Mothers all want their sons to grow up to be president but they don't want them to become politicians in the process." So it will be important in coming years to include Bean in our family discussions about budgeting, how to do it, and why we need to do it. Perhaps one day he can be part of the catalyst that instigates change for this country - never underestimate the power of a single moment.
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