There are certain things in life that I will never understand. Why does the shampoo bottle always empty like 2 months before the conditioner runs out? Why did the chicken really cross the road? and most importantly, where the hell does all my money go? The past year, I 've been on a mission to be cheap. I have to say, while I still have a ways to go, I have learned a lot from trolling the web and I want to share some information with you on budgeting. I know, I know, budgeting is something that everyone hates for multiple reasons. Mainly, its a pain in the ass and time consuming. It also takes some serious planning as well as self restraint to make it work. Today's entry will start with the basics and then delve into what I call a more psycho planning approach to budgeting. Depending on how hard core you are about saving money, you may be able to stop reading this blog entry earlier on. The remainder of the strategies, are not, for the faint of heart. More on that later, lets get the basics on.
Let me start by saying that I used to be a huge fan of Suze Orman. I thought she was the guru of finance and all things budget friendly. I have a few of her books, but after a while, she just wansnt working for me. A lot of her advice was specific to situations that I wasnt in, or even worse didnt apply to me. I ended up leaving Suze in the dust, and moving on to a bigger badder finance wizard, enter Dave Ramsey.
If you dont know who Dave Ramsey is, you need to aquaint yourself. He breaks down savings and planning into a fool proof way. His most basic system is what he refers to as The Seven Baby Steps.
1. Save up $1,000.00 for an emergency fund
Dave explains that things breaking down and malfunctioning isnt a matter of if it will happen but when. We have all had our car break down, or had to take our dog to the vet unexpectadly. You need to be ready for these things. A starting amount of $1,000.00 should be enough to cover you in case of an incident.
2. Pay off all debts using the debt snowball.
The snowball is a system that is easily implemented. You order your debts from lowest amount owed to highest. Interest rates shouldnt be taken into account, because this is all about momentum and having little successes to keep you motivated to continue. Begin by paying off the lowest amount owed. At that time pay the minimum payment on all other debts. Once the bill is paid off, use that money on the next debt in addition to the minimum payment and so on. Heres an example...
Macys - $600.00
Kohls- 1,000.00
CitiBank- $3,000.00
In this case, you would pay off Macys first. Lets say your payment is $50.00 a month. You pay until the balance is zero. Then take the extra $50.00 and start applying that to your Kohl's charge in addition to the minimum payment you were already making. Hence the snowball method. Once Macys and Kolhs are paid off, you can move to citibank. At this point, you have $100.00 in addition to the minimum payment.
3. 3-6 months of expenses in savings
Incase of a medical issue such as surgery or perhaps a loss of your job, you are prepared to live while you get back on your feet. Imagine if you lost your job tomorrow. How long would you be able to survive on what you currently have saved?
4. 15% of your pay into a Roth IRA or Pre Tax retirement fund
If you dont have a retirement fund set up. DO IT NOW. The earlier you start, the more money you can accumulate over the years. If you start early enough, you will be able to acrue interest and be in a good place. Please dont wait too long to do this. You will lose a significant amount of money if you wait till your 30's to open a retirement fund.
Consider this scenario: If you begin saving for retirement at 25, putting away $2,000 a year for just 40 years, you'll have around $560,000, assuming earnings grow at 8 percent annually. Now, let's say you wait until you're 35 to start saving. You put away the same $2,000 a year, but for three decades instead, and earnings grow at 8 percent a year. When you're 65 you'll wind up with around $245,000 -- less than half the money.
5. Save money for college for your children
its never too early to start, and every penny counts!
6. pay off your house early
Begin by throwing all your extra money into your mortgage payment.
7. Build your wealth and give.
When you have financial peace, give back to your community and church.
Tips for budgeting
The Envelope System from Dave Ramsey
Budget each paycheck.
Budget is a dirty word to most people, but you must budget down to the last dime if you're going to successfully implement the envelope system.
Divide and conquer.
Of course, there will be budget items that you cannot include in your envelope system, like bills paid by check or automatic withdraw. However, you can create categories like food, gas, clothing and entertainment.
Fill 'er Up.
After you've categorized your cash expenses, fill each envelope with the money allotted for it in your budget. For example, if you allow $100 for clothing, put $100 in cash in your clothing envelope for the month.
When it's gone, it's gone.
Once you've spent all the money in a given envelope, you're done spending for that category. If you go on a shopping spree and spend the $100 in your clothing envelope, you can't spend any more on clothes until you budget for that category again. That means no visits to the ATM to withdraw more money!
Don't be tempted.
While debit cards can't get you directly into debt, if used carelessly, they can cause you to over-spend. There's something psychological about spending cash that hurts more than swiping a piece of plastic. If spending cash whenever possible can become a habit, you'll be less likely to over-spend or buy on impulse.
Give it time.
It will take a few months to perfect your envelope system. Don't give up after a month or two if it's not clicking. You'll get the hang of it and see how beneficial the envelope system is as you dump debt, build wealth, and achieve financial peace! See ... simple!
Certainly, some bills may come in at different times of the month, so you'll need to adjust your written game plan to take it one step further. You need to plan the budget based upon your pay periods.
The Fun Cheap or Free Queen
This girl has some seriously awesome advice. Please watch her video below for a more strict money saving budget. I have been trying to use this one for a while now. Its hard to do, but its also fun to try. Give it a whirl if you are brave. Click the link to go to her site, then watch her you tube video. Its worth your time!
