Budgeting Basics

Ok kids, we all want money and we all want to be rich. Already I can hear the whining..."But Rocketshoe, I don't make enough money, I live paycheck to paycheck. I also have too much debt! How can I possibly save any money?!? Ooh there's a sale at mall..." Well, Rocketshoe is here to help.

For some, this may be rote, others may learn something, most will squirm uncomfortably in their seats while reading what needs to be done.

Everyone should have a monthly budget. A budget allows you to plan for the future, understand your financial boundaries, and pay down debt (Some will be surprised how much they really do make or how little--which will lead to hunting for a way to subsidize your income). Although writing a budget and sticking to it at first can be painful, it is very liberating and can give you a sense of security since you have a handle on it (much like working out at the gym, but without all the sweating--but that may depend on how much debt you have).

First and foremost--Pay yourself First. Contribute to your 401(k) (stay tuned for 401(k) and compound interest discussions). Its a free tax break. At least contribute as much to gain all matching from your employer. If you never see it in your checking account, you won't get to spend it. Talk to your HR rep at work to set this up.

Second, start with your take home pay on the top line and write down your monthly bills--rent, utilities, car payment, student loan, etc. If you come up with a negative number, you need to cut expenses. A generally accepted break down is as follows:

Housing: 30%

Utilities: 10%

Food: 15%

Transportation: 10%

Clothing: 5%

Debt Repayment: 10%

Entertainment:5%

Insurance: 5%

Savings: 10%

Of course this is only a suggestion and it is elastic. If you are not hitting 30% of rent, add the leftovers to another topic. If you are over in any category, take from another. Also reexamine your situation--do you really need all those extra ringtones and text messaging on your cell phone? Could you stand to bring your lunch to work? Should you be partying it up during the week as well as the weekend? Could you ride your bike more often? Creativity and being honest with yourself are key to balancing your budget.

Out of all the topics above, Debt Repayment and Savings are probably the most important in terms of your financial future. Everyone should strive to have an emergency fund of at least three months of expenses in the event you lose your job or are unable to work. This can take time to build, even if just $100 a paycheck, but when bad things do happen, you will be able to survive without going further into debt. Also, if you can afford more, start saving for that next vacation or big purchase. When you are paying in cash instead of credit, you'll feel much better about it and you won't be building up debt.

Debt repayment is good, very good. Nothing feels better than not owing anyone money. If you have more debt than you can pay off every month, you need to rank order the debt in terms of interest rates (This does not include debt where you do not have the option to pay different amounts, i.e. student loans, car payments, mortgage, unless you are paying more than the monthly payment.). Pay off the debt with the highest interest rates first. For example, if you have a credit card with an interest rate of 15% with a balance and you are making extra payments on your car payment which is at 8%, you are losing money. Why? It does you know good to pay down cheaper debt--you are losing money over the long run. (Note: If you can qualify, and make the payments on time, there is nothing better than a 0% loan, 'Same-as-Cash' option--which will be discussed as well in the future). Pay the higher debt down first!! Yes, and continue to contribute to that emergency fund, but pay down the debt!

Another option to reduce your credit card debt immediately is to consolidate your debt onto one card with a lower interest rate. It might cost about $50 to transfer, but having one bill at one low rate will help a lot. Also, some credit cards offer 0% interest for the first 6-18 months. This gives you valuable time to pay down debt while not incurring more interest. Although I do not recommend it, some folks have been transferring debt for years without paying a lick of interest by jumping from card to card and deal to deal. Check out this little nifty crawler from Kiplinger:

http://www.kiplinger.com/basics/archives/2003/03/credit2.html . It displays whats out there in terms of credit card deals. Also, please, please read the fine print on credit cards with respect to annual fees...you should never have to pay an annual fee for any credit card--you can be charged up to $90/month for frequent flyer miles!!!

Back to reducing spending--check out one of Wageslave's favorite places to hang out -- Fat Wallet.com (http://www.fatwallet.com/) . This forum has dozens of deals and techniques to lower your cell phone bill, find deals, and internet coupon codes. Not a bad place to save a buck or two.

Sticking to a budget can be very difficult if you are used to spending everything. Another approach that some folks use that I know works is to have two checking accounts. Your paycheck sends two amounts to two different accounts. One account you pay your bills out of (ideally, you would not have an ATM card to this account) and the other with your fun money in that has an ATM card. This way you are pretty much doing what you did before, but you spend less. Can be a little more time consuming to set-up, but it does work.

Another way to reduce spending is to not go out every night on the weekend. Spend an evening inside and develop a new hobby --like maybe a financial blog--or work on a business, or work a bit harder on your homework. Not only will you save money, but you may even be ahead of life when Monday rolls back around.

Finally, don't feel so bad about your financial situation. We all make bad choices and as Americans, we are not educated in our public schools on how to manage our finances. We work and live in an economy that is dependent on our spending, and everyday we are attacked on all sides by advertising that wants us to spend more and keep up with the Jones. Take hold of your financial future and get out of debt and/or save more money. You might be surprised how much you are spending at Starbucks. One last thing, the average American has about $8,000 sitting on credit cards. Damn.

Stay tuned for an article on what you can do with that extra money.

-Rocketshoe