The first rule of managing your money is Pay Yourself First. This is where the first amount you take out of any pay check is an amount you put aside for yourself or your family - for your future protection. The common amount is 10% of your income. That means that 10% of every paycheck is put in the bank to be used for special circumstances, for rainy days or emergencies.
In my last article, we developed our basic budget - a list for our income and expenses and broke them down to a monthly basis, with the ability to see if we were ahead or behind. As we talked about in the first article (Part 1), the four basic columns for a budget are monthly expenses, other expenses, regular income and other income. At the end of the last article, we just added and subtracted the proper columns and if you came up with a positive number you were good, if not, we need to reduce your expenses. Again, I want to emphasize a budget is a necessary tool for solid planning and management. A budget allows us to see how our income relates to our expenses and where we can reduce some of our unneeded and wasteful spending. Our spending habits alone can be the success or failure to our financial future.
The first rule of managing your money is Pay Yourself First. This is where the first amount you take out of any pay check is an amount you put aside for yourself or your family - for your future protection. The common amount is 10% of your income. That means that 10% of every paycheck is put in the bank to be used for special circumstances, for rainy days or emergencies. If you make $500 per week, $50 of that goes into a special account. The rest of your paycheck goes towards the rest of your budget and expenses. This 10% is where you will build the cushion you need for emergencies, vacations and etc. You will do this FIRST always and you will build an amount that is equal to at least 6 months worth of your monthly expenses. This means you add both the monthly and other expenses columns together and multiply by 6 for your "cushion" factor. So, if your expenses come up to $2500 per month, you need at least $15,000 in an account that will be for extreme emergencies or if you lose your job.
If you live in an area or work in a field where it could be hard to find work at times, you might want to use a higher value, say 9 or 12 months worth. Everything above that amount in the account can be for regular emergencies, car breakdowns, refrigerator goes out, etc. Also, you can plan large ticket item purchases out of this excess amount, vacations, buying a new car, etc. This 10% money should be in an account that does not have easy access. You should make this a separate account, better yet - make it a separate bank on the other side of town. Also, make it easy not to even see it. It's best to have an allotment or savings come right from your work sent directly to the bank so you never see it. The idea is to make your savings fund hard to get to. If you don't see it, you won't spend it.
With that thought in mind, if you can have your paycheck sent directly to the bank, do it. Cashing your check and having it ride around in your pocket until the next paycheck is the surest way to make it disappear. One day it's there, then the next you don't know what happened - but it's gone! You will not for the life of you be able to say where the money went but it will be gone and you will have nothing to show for it.
Which brings us to walking around money, you need to work that into your budget. Whether you label it as entertainment or lunch money or operating funds or something else, it must be factored into your budget. If you don't you will almost certainly end up short every month - too much month and not enough money. And if this sounds like a weekly (better) or monthly allowance, it is. But it's not your parents trying to control you, it's you trying to control and manage your spending - for your success. A subtle difference, but it may make your ego feel better about it.
Now back to the monthly bills. You should have already added up the two expense columns. If you factored everything in correctly, that will be your total expenses for the month. If you find you miss something, just add it in and revise your totals. Not all the money you allot to your expenses will be spent every month. This is not free or found money. Remember you factored in all your expenses for the year so some of them will be paid later in the year when the bill shows up. This will not be a shock because you have already set aside most or all of that money - open a separate account for the expenses so you don't accidentally spend it before the bill arrives. Any money you have that is in excess of your total expenses should be put into the emergency part of your savings fund to help build it faster. Remember, once the emergency part is built the excess funds can be put to the large ticket items and your regular savings fund.
Also the money you listed in your other income column should be put into your savings fund. It will build both portions of your savings fund faster.
Now, what if you added up your expenses and they were more than your income? You have two ways to fix this, more income or less expenses. If you need more income you may need to take a second job or if you are married, your partner gets a job. Even a part time job can help. You can sell things that you no longer use; a garage sale is a good start, or selling the spare car you never use. What about selling the dirt bike that has been in the garage for two years, wouldn't that money help? What about clothes that are out of style and still in good condition? They can be sold at a consignment shop. How about the electronics, cell phones and mp-3 players that you no longer use? They are great for putting on EBay or some other service site.
Whether you can raise your income or not, you need to also cut your expenses. There are easy ways and hard ways to do this. Here are some easy ways. Don't buy books, go to the public library and borrow them. You can also borrow CD's and DVDs from most libraries. If you go out to dinner 3 or 4 times a week cut down to once every two weeks, make it a special night out. Or once a week feed the kids early, then after they go to their room for the night, you and your partner can have a quiet candlelight dinner - much better than going out. Just having a quiet dinner at home can save $100 per week. Another idea, go for the smaller cable package, cut out the premium channels. And one of the biggest pick pocket expenses is stopping for coffee everyday at Starbucks. Brew your own and it could save over $120 per month. Don't forget the video rental store, renting a flick and staying home instead of going to the movies could save $20 per person per movie night - this one adds up quickly. Just look at the general categories (entertainment, etc.) in your budget and you should find something you can eliminate or change that can save you over $100 per week.
Now let's look at the hard ways. Things that you are making payments on and you don't need can be sold or turned back to the lending authority that is funding the item. We may not want to give up our toys but, boats, motorcycles, extra cars all need to be eliminated. Cars that you are paying $1000 per month can be sold and you can buy a car with a $500 payment. Net gain of $500 per month and you can still get to work. This tip alone can also lower your yearly taxes and monthly insurance for more savings. In the present economy, some dealerships are even accepting vehicles back so they don't have to find and repossess them. Not a popular choice, but the idea is to get yourself to a point where you can pay your debts with your existing monthly income.
Another thought is if you rent in an expensive neighborhood or area, find a less expense rental. There are plenty of safe neighborhoods that don't cost an arm and a leg to live there. With the market like it is, many landlords have no choice but to lower the rent in the higher neighborhoods. If this is an option, you need to consider all factors, transportation costs, grocery store availability, school quality, day care, etc. If you factor everything and it costs less to live in the expensive area then stay there, but be honest with yourself. Living in a high cost neighborhood doesn't really do anything for your family except to drain your resources. But getting out of debt and financially secure IS something positive for your family. There will be many items in your budget to consider, and many ways to trim it. You just have to look at it carefully.
We've talked about implementing the budget we built in Part 1 of this series. And we looked at some ways to get ourselves to where we are paying all of our bills with our monthly income. In the upcoming third part of this series, we'll talk about further implementing our budget and ways we can get ourselves past the payday to payday trap - and just about debt free.
Be well.
