How to create a budget - Post #1

I realized that I’ve posted several times and referred to your budget. But some folks may not know the mechanics of starting a budget. So with the new year approaching, I thought I'd post a series on the steps for creating and working with a budget.

Step 1: Determine what time-frame you’re going to use for your budget. The typical time-frame is monthly, but if you get paid on a different frequency and prefer to budget bi-weekly or bi-monthly, that works too. Just choose what works best for you, after all, it is your budget.

Step 2: Determine how much income you make during your budget time-frame. Please see this earlier post about converting your pay frequency to monthly (if you want to budget monthly); and how decide how much income you should budget if you aren’t paid on salaried basis.

Step 3: Figure out how much you’ve actually been spending. This is where your eyes can really be opened to where and how you’re spending your money. If you use software to track your checkbook, you should be able to run reports that will give you this information. If you don’t currently track your spending, you may have to start tracking it for a couple of months before you can really create your budget.

Please check back for the next post that details the next steps in the mechanics of creating a budget.

Can you have ANY fun with your money?!

During these times when everyone is feeling the pinch of the economy, we all hear advice that we have to be very careful with our money and watch every penny that we spend. I agree with that advice, but not to the same extent that I hear in some recommendations.


I agree that it is very important to make a budget and to understand where your money is going. But part of that budget should include some "fun" money. We all need to be able to spend money on things that we enjoy from time to time. You may not have enough money to spend much on fun activities, but you can probably include a little in your budget and set it aside each time you get paid. After you've saved for a little while you'll have enough for that small vacation, the trip to the amusement park, or whatever activity you and your family really enjoy.

I agree that it's important to be fiscally responsible, but you should be able to live life and have fun at the same time.

Cash only Christmas

With the holiday season upon us, the money spending frenzy is now beginning. Going into unmanageable debt so that you can buy gifts for everyone on your holiday list is not what the season is about. I'm not going to assume that I know what the season does mean to you, but I know that the people who really love you don't want you to put yourself in financial trouble just so they can have a shiny new gift.

I save money each month for Christmas shopping, so that I'm on a cash-only basis with my holiday shopping. If you haven't been saving for holiday shopping all year, you can still work to have a cash-only Christmas. Make this holiday less elaborate, and then start saving in January for next Christmas. If you're one of the lucky few still getting a year-end bonus from work, you could use that to pay cash for your gifts. Or you can get creative with your gift giving. Between families, friends, co-workers, children's teachers, etc.; the bill can really add up. This might a good year to give hand-made gifts. My mom always gives my grandmothers calendars with pictures of the family. They aren't terribly expensive, but they are very treasured.

If you work to get yourself on a cash-basis during the holiday, you give yourself a big financial advantage for the rest of the year.

Why it's always been dangerous to be in debt

We're getting a good reminder these days of why it's not so good to be in debt. Businesses are struggling and failing because they've over leveraged themselves. Individuals are losing their houses because they can't make their payments. Our government is borrowing money to solve all of these problems so we don't experience a more drastic economic collapse.

But there were times when the consequences for debt were even more severe. Charles Dickens wrote many semi-autobiographical novels in which he talked about the consequences of debt. His own father spent time in debtor's prison. Yes, you used to go prison (and a very unpleasant prison at that) if you managed to get in debt and then couldn't pay the money back. How anyone ever thought they'd get the money back if they threw the debtor in prison is beyond me, I guess they expected the families to pay them back to get their loved ones out of prison.

Professor Robert Douglas-Fairhurst has written about the comparisons between our current economic crisis and the one in 19Th century England that inspired much of Dickens's work. I don't know about you, but I'm pretty grateful that our economic crisis likely won't result in the same level of social issues.

How to manage your money when you don't make much

When you're not bringing home much money, you have to be even more creative about managing your money. Especially now in this time when we're facing extraordinary inflation on the essential items that we all have to buy. Here are a few things to think about if you have to manage a very small budget with shrinking buying power:

Are you spending money on non-essential items? If so, this is probably a good time to reduce that as much as possible, and make sure you're saving up before buying any big items.

Are you shopping at the least expensive grocery store in your area? I wouldn't travel too far away to find the cheapest price since that could waste gas or mean a larger bus fare, but most communities have more than one store choice fairly close. And make sure to look for the generic brands with the same ingredients, but a smaller price tag.

Have you shopped around for insurance and found the best price? Check with your benefits department at work to see if they have negotiated any group rates on home or auto insurance; or check with your insurance agent to make sure you've got everything bundled and are getting the best rates.

Have you adjusted your thermostat? If you turn it down a few degrees this time of year and wear a sweater inside, it can save money on your utility bill, and research shows you sleep better in cooler temps. Also, make sure to check with your local utility company to see if they have any assistance for your income level.

Do you turn the water off when you're not using it? I'm pretty good about doing this, but my kids aren't. So I try to remind them when they're brushing their teeth to shut the faucet off. This won't save a ton of money, but it will save some, and every penny helps these days.

Do you shop at thrift or second-hand stores for clothing? If you have kids (who seem to grow an inch a week sometimes!), this is an especially money-saving way to shop. Many of the clothes are in very good condition because another child outgrew them before they could ruin them.

Do you walk or ride your bike when it's reasonable? It saves on gas if you don't start up the car to make a trip 2 blocks over.

As an added bonus, some of these tips are better for the environment and your health (and being healthy can also save money)!

Why Money Management is More Important Than Ever

Given the current economic situation, successfully managing your money has become more important than ever. One of the big worries that has the government scrambling to get a bail-out bill passed is the effect on the ability of individuals and small businesses to get a loan. The government is very worried about banks and other lenders becoming more reluctant to offer credit. One could argue that might be the right road to take long-term, but it would certainly continue to slow the economy in the short-term.

So how do you ensure that you always have the credit you need? By managing your money and maintaining a strong credit score. If you look like a safe bet, you'll likely still be able to borrow money when you need to. But if lenders look at your credit history and have concerns about recouping their money, you may be one of those on "Main Street" feeling the effects of the economic crisis on "Wall Street".

European vs. American Financial Institutions

According to a broadcast on NPR, the European banks are blaming America's current financial crisis on too little regulation, too much debt, and not enough savings. Europe sounds like me!

Regulation: You have to have a good understanding of what is happening with your money to be able to manage it. If you've worked in business you've undoubtedly heard the old adage, "what gets measured, gets managed."

Debt: In order to get and/or remain debt free, we must spend no more money than we make, and preferably less than we make.

Savings: It's important to have money set aside each month for all known expenses, and equally as important to have a long-term savings plan to send your offspring off to college, and to someday be able to quit working.

It's a good bet that the government won't bail you out to the extent that they're bailing out the banks right now, since your collapse doesn't jeopardize the global economy. So maybe we as individuals should follow the example of the European banks rather than the American banks.

Teaching Kids About Money Management (Part 2)

Although we never want to scare our children about money, I believe that open, honest conversations about the way we spend our money teaches our children to make better choices.

The other day my husband was at the grocery store with our daughter. When they were checking out she asked her dad when she could have a credit card so that she could buy anything she wanted. (Editorial note - my husband was actually using the check card, buying groceries on the credit card is a sure-fire way to take on unnecessary and unwanted debt!) My husband explained to her that using a credit card didn't get you anything you wanted. When he signed the card it was his promise to pay that money back.

He also talked to her about the difference between getting things that we want and getting things that we need. He told her we need groceries so we regularly spend money on them. My husband, who has a horrible CD habit, explained that those are things he wants and that mommy makes him save up his money to buy those!

So a quick trip to the grocery store turned into a good money management lesson and now our 7-year old knows more about how to use a credit card than some kids who are 18 years old. Take any opportunity you can to talk to your kids about how to use their money, it's much easier to learn how to do it when they're young than to learn the hard way and have to work their way back out of debt.

In Case You Needed Another Reason To Get Healthy

In case you needed another reason to get healthy, how about your long-term financial goals? This is a very interesting article by Dan Kadlec that appeared in Time Magazine. It makes perfect sense and is one more source of motivation for making healthy decisions.

Teaching Kids About Money Management (Part 1)

A coworker posed the question to me about how we teach kids to manage money today. Money is much less tangible than it used to be, we get our money direct deposited and electronically transfer it to other accounts. We pay our bills on line and most of us use debit cards (or credit cards, but check out previous posts to see my opinion on that!) Kids today don't often see cash to understand where all that electronic money is coming from, which can lead to later financial trouble.

I am a firm believer that kids should start with cold hard cash money when they're first old enough to start purchasing things. It helps to give them a solid grasp on what money is. It then becomes easier to explain to them when they start getting gift cards how the money is loaded onto them and that they can only spend up to the balance on the gift cards. Which also helps them to later understand debit cards and the even more abstract idea of credit cards.

My kids' school district teaches math using a curriculum called "Everyday Math" that was developed by the University of Chicago. I think it's a phenomenal math curriculum that teaches math the way we think about it. But the other thing that I really like about it is that it has kids use actual coins and bills to learn about money, and also has them use symbols for the same money. So they start to see different depictions that all represent the same money. OK, I've spent enough time on that soap box. I'll post again on this topic since there is so much to talk about here.

How to Make a Budget

So I've told you that in order to get out of debt you have to plan for paying that debt down, but how do you go about making that plan? By making a budget. But how exactly do you go about creating a budget?

The first thing you have to know is how much income you earn. If you're salaried this is pretty easy to figure out. The only small challenge here is figuring out the timing if you aren't paid monthly or bi-monthly since most of your bills will be monthly. If you're paid bi-weekly, you have a choice about how to budget your income. You can either multiply your salary by 26 and then divide by 12 to figure out a monthly amount, or you can budget for 2 checks per month and the two times per year that you receive a third check, this can be extra money. The other option is to plan the timing of your checks and plan certain checks for certain bills. The method you choose here should be the one that works best for you.

If you are paid hourly, piece rate, or any other type of rate that doesn't guarantee the same amount on each paycheck, figuring out how much income to count on can be more difficult. You can figure out an average of the amount you bring home on each paycheck, or you can figure out a minimum that you always bring home and treat any additional amount as extra just like the salaried method.

The next step in budgeting is determining what your expenses are. Some of your bills are easy such your mortgage or rent, daycare, car payments and other set expenses which just get plugged into your budget at the amount you pay every month. Bills like utilities, groceries, gas, clothes, etc. are more variable and you'll probably need to figure out on average how much you spend on those bills each month to plug into your budget.

You may find that after you put down all of your expenses, you're spending more than you make each month. This is frequently part of the problem with going into debt, when we continue to add expenses without making sure that our income can support the additional expenses. If this happens, the solution is either making more money (good luck and let us all know if you figure that one out!), or cutting your expenses. Maybe you'll find that you've been spending about $200 per month on clothes. So you can look at spending $100 per month, and not allowing yourself to spend any more than that. If it's your utilities that are causing you to blow your budget you can try setting your furnace 2 degrees cooler and wearing a sweater in the evenings; or spending a little bit of money and getting a programable thermostat. If it's your grocery bill, look for coupons or try a generic brand of your favorite food. The key to getting your finances back under your control is to spend less than you make; and having a full understanding of how much you make and how you're spending that money is the first step.

How to Eliminate Debt

Nearly all of the advice you read or hear about money management recommends not spending more money than you make. But what do you do if you've spent more than you should have in the past and you're carrying unwanted debt? You make repaying that debt part of your budget.

I once worked as a Before and After School Program director at an Elementary School. When I took over as Director of the program, it was $40,000 in debt on an annual budget of about $160,000. Getting the program back to it's self-sustaining status was a pretty daunting challenge, but one I was willing to take on.

I drafted a budget for the program which included that debt as a monthly expense so that it would be paid off by the end of the year. This plan meant having to cut spending in other areas. We accomplished this by doing a few things differently than we had in the past. We went through all of the craft cabinets and cataloged all of the leftover supplies from old crafts. We then planned our new crafts around those old supplies instead of always buying new supplies. I scheduled the staff differently so as our numbers went down in the late afternoon, staff went home, which worked well for the high school students working in the program. I also worked with families who were behind on their payments to help them to make plans to get caught up.

By the end of the school year the program was not only out of debt, but had a surplus of $4,000 that we were able to donate to the school to buy a marquee sign for the front of the building. My daughter goes to that school now, and every time I see that marquee sign I remember what good money management can accomplish.

So if you're carrying debt that you’d like to get rid of, make it a part of your budget. Decide how much you can pay each month and pay that amount. You'll need to include any interest that you owe as part of the budget or you might just feel like you're only staying even, and absolutely make sure that you’re paying more than the minimum amount required. This might mean making some cuts in other areas, but the result is well worth a few sacrifices. If you stick to your payment plan each month, you’ll be able to get rid of that debt and rest easier in the knowledge that your financial situation is much more secure.

Good Debt vs. Bad Debt

Is there such a thing as “good” debt? My grandparents didn’t think so. They grew up during the Great Depression and they never took out loans for anything their entire lives. They paid cash for every vehicle they ever bought. They built their house in stages, living in their basement for a time so they wouldn’t have to take out a mortgage. I have to respectfully disagree with my grandparents, I don’t know that any debt is really great, but I think some is both necessary and not all that bad.

The first kind of debt that I recommend is a mortgage. The vast majority of us have to pay someone for our housing, whether we pay rent or a mortgage. And if you pay a mortgage you’re building up equity (albeit at a slower rate than it was once possible to do.) You can also use part of your mortgage interest payments as a deduction on your taxes. So overall, I’d call a mortgage good debt.

Car loans are a little harder to justify, but I live in Denver which isn’t known for stellar mass transit options, and my husband and I both have to get to work. So we have auto loans for our cars that is maybe not “good” debt, but it is pretty much necessary debt.

My husband went back to school a few years ago to get his Master’s Degree and we took out a student loan to pay for his schooling. I also think this is good debt because it allowed my husband to get a raise (he’s a teacher and he automatically gets more money for higher education), and the required payments are so low that it’s easy to pay additional principle on the loan.

So I guess I’d call debt "good" if it’s necessary, has a reasonable interest rate, and/or helps you to improve your life in some way. Bad debt is pretty much everything else, especially those nasty credit cards that definitely do not have a reasonable interest rate!

The Secrets of Successful Money Mangement

There are really only two things that you need to know to successfully manage your money:

1. Know how much money you earn and how many bills you have to pay (a.k.a. "budgeting"). Most of us have heard the old adage that you shouldn’t live beyond your means, spending more money that you earn. Easy to say, not always so easy to do. Knowledge and planning are what allow you to heed this oft-given advice.

2. Delayed gratification. If your water heater goes out, it's probably a good idea to accept some debt so you can get it repaired and not go to work with hypothermia or unkempt. But if your old television set works perfectly fine but you really, really want that large-screen LCD crystal flat-panel set, you should probably wait until you’ve saved up enough money to buy it rather than purchase it on credit.

If you can make a realistic budget and stick to it by controlling your spending and saving up for new purchases, vacations, etc. in advance, you'll be well on your way to successfully managing your money.

Doing my part to contribute to a global economic recession

The idea of this blog is to share some of my knowledge to help people who have questions about how to manage their money to live within their means. After reading this article I wondered if this is really a good thing to do!

My Inaugural Post

This being my first post, I thought it appropriate to explain a bit about my background and what qualifies me to give money management advice. -- When I was a little girl my parents gave me a weekly allowance, and I would immediately pull out my ledger book. (This was back in the days before the fancy ATM piggy banks!) I had 3 categories that I placed my allowance into: 1/2 of the money went into long-term savings (for that oh-so-distant idea of college), 1/4 of the money was placed in short-term savings (for the more expensive toys), and the remaining 1/4 was mine to spend at the toy store or 7-11 whenever I wanted. I didn't manage to put myself all the way through college with 1/2 of the allowance I received as a child, but I always had plenty of money for anything that I wanted (unlike my brother!)

My method is more sophisticated these days, but I still use the same basic principles and I still always have enough money for everything that I need. I have also managed to remain free of credit card debt for the majority of my adult life, and start saving for retirement and college funds for my kids. I still place my money in 3 categories to be able to better manage how I spend it. The 1st category is investments like 401k, Roth IRA, savings account, etc. The 2nd category is allocated money which is how I save for Christmas, home repairs, license plates and the like. The 3rd category is my regular checking account that contains my spending money, although I spend it on vastly different things than I used to!

I have plenty to write about in this blog, but I'm well aware that I can't think of everything so I'd love to get your questions. I am not a financial planner or advisor, and I won’t pretend that I can give you advice on what stocks or bonds to invest in to get rich. If you send me a question that I can't answer, I'll be honest, but if you have questions about things like how to budget or how to make sure you have enough money leftover before every paycheck, I can probably give you an answer that could help you out. So email me those questions at themoneymaiden@yahoo.com.