This was originally published on Monday, December 23, 2013, in the Pacific Daily News. Click here to subscribe to the PDN.
Question: I want to get my spending under control, but I’m not sure how to go about it. I know that I should have a budget, but I just don’t know how to start.
Answer: You are on the right track. You definitely need a budget. A budget is essential and is a useful way to get a grasp on your spending. It is a simple instrument to help you recognize where your money goes. Most experts recommend that you should save at least 10 percent of your income and put it in some kind of savings account. With a budget, you can reach your financial goals, such as paying down credit cards or saving for retirement.
When it comes to creating a budget, find a way to track your expenses. You do not have to buy a fancy expensive budgeting program.
You can put your expenses into a spread sheet or in a notebook. Another way to keep yourself inline is an app for your smartphone. Some of these apps can even breakdown how you are spending your money. Prices for these apps range from free to a few dollars.
Your budget should include the amount of money you have coming into your household such as pay from work, pension, government benefits, child support and alimony. Then simply subtract all your expenses such as rent, utilities, insurance, groceries and so on. Don’t count on money that you may receive in the future.
Use your budget to categorize how you are spending your money and where you can cut back. Be sure to save a little bit for entertainment and personal expenses.
If you make your budget too tight, you will not be able to stay with it. Look at your budget every quarter and make necessary changes, especially if a major life event happens. If you find that you are in surplus, open a savings account, invest or make a larger contribution to your retirement plan.
If you receive a pay raise, bonus or tax refund, put the money straight into a savings account or pay off debt. If you find that you are breaking even or in a deficit, take action to fix it. Look at what you can cut back on and find ways to help you save such as coupons, carpooling or trimming your utility bills.
Look for unnecessary expenses such as late and ATM fees. Another big expenditure is eating out; it costs less to cook at home and is usually much healthier for you.
Spending beyond your limit is dangerous and can lead to some very stressful situations. Government figures show that many households that make $50,000 or less spend more than they bring in.
Know the difference between wants and needs. A need is something you must have to survive, such as food, shelter and medical care. Needs can be very basic and do not have to cost a lot.
Creating a budget can be tedious at first, but once you get into a routine it becomes less of a hassle, especially once you start seeing results. Budgets are also enlightening once you see just how your money is spent. Now that you have a good idea of where your money is going, start thinking of what financial goals you want to accomplish.
Merry Christmas to all!
Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii.