Monthly Archives: December 2010

Balance Your Books, or Else. Part III

Scrooge is alive and well and should be living in your house…if you are spending more than you earn.  By now, because you’ve done the hard work of laying out income and outflow…you know if Scrooge is a guest at your table.

You’re almost ready for the big finale but first, a word of warning. What you’re going to do now is a whole lot easier than laying out expenses but the first time you see the numbers in black and white (and maybe a little red), you might experience some pain so be prepared.

In the first scenario, one significant other loses her income but the other keeps his.  These numbers look pretty good and more than cover the costs so this couple can go ahead and spend everything they are used to spending right?  Well, no, not unless they want to hit a financial brick wall really hard.

Hers His Total Post Tax
$20,000 $57,000 $77,000

 

What do you mean?  Their income is exceeding their expenses, why can’t they keep on living a little high?  I will answer that question with another.  What happens when both partners are on social security?

Income will drop to about $40,000 per year, assuming both make it to their “retirement” years.  And expenses will still be $51,000.  This one’s easy.  This couple will instantly be $11,750 short and the road to financial ruin is pretty much downhill from there.

So, what do you do when you find your income is very close to your expenses or maybe even less than your expenses?  Some hacking!  And you do it as early as possible so you can build a little pad behind your income that can carry you through short years.

Cut entertainment and get $5500 or half the required amount back.  Draconian?  Yes but necessary to balance the budget.

Start getting serious about your food shopping.  If you work it right, you could shave $50 a week off your food bill without trying too hard (more on that later).  That’s another $2600 cut off your expenses.

You could probably save another $2600 just by planning trips to the store and ride sharing  to cut down the gasoline bill.

Look at your phone, internet and television bill and see what you can shave off of them.  Taking $20 a month off the phone and $30 off the cable bill quickly adds up to another $600 saved.  Just with these three tips, you will save $11,300, immediately – just $400 dollars away from the nut you need to stay solvent.

Get rid of any credit card debt and pay down those items that make up the “fixed costs” like car loans and your mortgage as quickly as you can.  That may mean taking a second job but now is the time to make sacrifices and balance your own budget.  Waiting until you “get retired” will move you from balancing on the edge to spinning down the mountain, out of control – not where you want to be when your golden years are thrust upon you by being laid off, severed or “retired early.”

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Balance Your Books, or Else. Part II

Balancing your books is relatively easy.  You just have to have the time, the information and a little determination to draw a clear picture of what you have, what you owe and what you need to bridge the gap.  Warning – some charts are involved!  Aspirin may be required once you see the numbers.

Using pen on paper or a PC, whatever you are most comfortable with, get started laying out your expenditures.  You need to be able to answer one simple question:  where do you regularly spend money?

A great way to get started is to create spending categories.  If you are lucky, your credit card company already has your categories broken out and will even provide an annual summary and detail statement of every dime you charged every time you charged in the prior year.

If you don’t have access to that kind of information, general categories could include things like gasoline or transportation costs, food, electricity, communication including phone, TV and high speed internet, rent or mortgage payments, car payments, entertainment, personal upkeep for dry cleaning and hair dresser costs and a category for sundries like make up, shampoo, lotions and potions   Just make sure you capture everywhere that you spend money….yes, including Starbucks.

Once you have the categories, make sure you add some categories for those once a year charges.  Why?  Because these one-time costs that will KILL your budget if you don’t.  These are items like insurance – life, car and house and taxes including property taxes and school taxes.  In the example below these are called “Fixed” costs.

Now add up the columns.  If you did monthly costs, multiply by 12 to get annual, recurring costs.

Add the one-time, once a year charges and you will get your total, annual outlay which might look something like this.

Electric Phone Heat Food Fixed Gas Entertainment
$2,150 $3,350 $1,600 $5,600 $18,000 $7,600 $5,500

 
Add the numbers up and it comes to $42,300.00.  Now that’s a whole lot of post tax income needed to keep the engine of your life running.  So, the next step is to see if your post tax income is going to cover the expenses.

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