Budgets that work (honest)
(Article by Jane Bennett Clark from Kiplinger's Magazine, January 2005)
Whether you use a PC or a pencil, tracking your expenses can lead to big rewards.
Here's our candidate for the New Year's resolution that'smost frequently broken: Set up a budget.The b word can be so off-putting that financial professionals often prefer to use the more euphemistic "spending plan." As for actually sitting down and setting one up ... anyone for cleaning out the basement?
Yet figuring out where your money goes is the only way to get it under control. And the process doesn't have to be difficult. To make sure that your resolve -- and your budget -- last beyond January 31, follow these basic rules:
- Keep it simple. A successful budget needs to be compatible with lessons that you learned in kindergarten: Stay on task and take one step at a time.
- Make it personal. Rely on sophisticated software if you wish, but paper and pencil work fine, too.
- Be positive. Don't think of a budget as a straitjacket that limits your spending and takes the joy out of life. Think of it as a way to control small expenses now so that you can buy bigger stuff -- and have more fun -- in the future.
To set up budgets that worked for them, the individuals profiled below marched to the beat of their own drum. But they all ended up just where they wanted to be, whether it was savoring the pleasures of a new home, sitting atop a comfortable savings cushion or taking an exotic vacation.
Set a Goal
When he was just out of college and not making much money, Matt Lorano set a lofty goal for himself. "I wanted to buy a house," says Lorano, 31, a claims processor in Cleveland. With his girlfriend, Jill Moran, he achieved that goal four years ago -- and immediately set himself another: "Now I want to pay off the mortgage."
To get organized, Lorano started with an Excel spreadsheet, dividing his income among fixed expenses, such as rent and utilities, and discretionary outlays, including groceries and clothing. He earmarked savings for a down payment and set aside another fund for emergencies.
With his budget set up, Lorano now uses Quicken to keep it running smoothly. The software helps him allocate paychecks, and it recalculates subtotals based on expenditures, which Lorano enters almost daily.
Budgets don't have to be draconian. But to meet their goal of being mortgage-free within six years, Lorano and Moran say they are cutting back anywhere they can. They eat out sparingly, keep clothing costs to a minimum, and limit their grocery bills to about $100 a week, which allows them to almost double their monthly mortgage payment.
Once the mortgage is history, Lorano plans to shift the money toward other investments. "What really motivates people to curb spending is having a goal," says Christopher Jones, of Keystone Financial Planning, in Easton, Pa. "Why cut back unless you have something more valuable to spend the money on?"
Get outside help
As newlyweds in 1996, Curvie and Laneshia Hawkins started out $64,000 in debt. "We had a car payment and credit-card bills, and we both had student loans," says Curvie, now director of planning for the Fort Worth Transportation Authority. Then, two days before their wedding, he suffered a bout of appendicitis and had no insurance coverage -- "I was supposed to get it through my wife's company once we were married." He and Laneshia exchanged vows at his bedside, and their wedding gift was a $10,000 medical bill.
As budget busters go, debt is a sledgehammer, and it often breaks up relationships as well. Curvie and Laneshia sought outside help from the Consumer Credit Counseling Service of Dallas, a member of the nonprofit National Foundation for Credit Counseling ( www.nfcc.org ; 800-388-2227).
At the urging of their credit counselor, the couple decided they could allot $1,500 a month to paying off their debts. "That was the easy part," says Curvie. "Then we had to figure out what to give up."
They tore up credit cards and clipped coupons. When their car broke down, they asked friends to recommend a small repair shop that was less expensive than the dealership. They stopped going to movies.
The Hawkinses had already loaded all their financial information onto the computer so that Laneshia could check the balances in their accounts and Curvie could pay bills online. Meanwhile, the counseling service renegotiated the terms on some of their loans and set up a system in which the Hawkinses paid more than the minimum on the loans with the smallest balances. That arrangement allowed them to see progress right away. (They could also have started by paying off the loans with the highest rates.) As each debt was retired, the extra money went toward the next loan.
Within five years, the Hawkinses had met their $64,000 obligation and amassed enough in savings (by putting aside their pay raises) to afford a down payment on a house. In 2002, their 2-year-old son, Jadin, took command of his first backyard. Says Curvie: "Seeing him run through the yard and play on the swing set--that was awesome."
Pull out your pencil
Andrea Roane prides herself on the wedding present she gave her husband, Michael Skehan, several decades ago. Before their marriage, she set up a budget-tracking system that helped her retire a stack of credit-card bills. Every time she paid off a bill, she cut up a credit card. On their wedding day, she presented her husband with a handful of plastic shards. "It was my gift for our financial future together," says Roane, a news anchor at WUSA-TV, in Washington, D.C.
Roane is still faithful to her budgeting system, which involves no special wizardry: She uses a pencil and a bookkeeping notebook to record expenses and target excesses. "I like the paper-and-pencil thing," says Roane, who always keeps a notebook handy. "It's my way of staying organized."
Roane and Skehan keep a joint checking account, as well as separate accounts to cover their personal expenses and those they've agreed to handle independently (she pays the cable bill, the mortgage and the car-insurance premium). Roane uses her notebooks to remind her when bills are due and to plan for occasional expenses. Starting in the fall, she sets aside money in gift cards for each person on her holiday gift list. "That's all done by Thanksgiving, so if I have to pay certain bills by the end of the year, my December paycheck isn't cluttered by Christmas obligations."
Roane has taken a fair share of ribbing from her family for her painstaking approach. But she is unfazed. "It's my check and my expenses," she says. "I organize me."
Build a buffer
As a financial planner in Atlanta, Bryan Clontz adheres to the golden rule of budgeting: Pay yourself first. But that's not feasible unless you know where your money is going and how much you can set aside. So Bryan and his wife, Kim, set up a system with enough leeway to ensure that they can save on the first of the month without having to borrow back the money on the 15th.
Once a year, the Clontzes review their bills and select the highest monthly tab in each category during the previous 12 months -- say, $200 for electricity -- and plug that into their budget for the coming year. "That way, we have a built-in buffer," says Bryan. As an extra precaution, the couple set aside money for emergencies.
They also give themselves an allotment that each can spend with no questions asked. "Kim can buy shoes or whatever -- I don't care," says Bryan. "We hate discussing how we spend cash."
Separate slush funds can help a budget succeed by maintaining morale, says Judy Lawrence in The Budget Kit (Dearborn). Failing to factor in "mad money" only leads to frustration, she points out.
Having accounted for contingencies, the Clontzes feel comfortable about investing a set sum at the beginning of every month. "There's no way we're going to go through the highest amount in each category plus our discretionary funds," says Bryan. So well-planned is their system that the Clontzes don't bother to balance their checkbook or use budget software. In fact, they usually have a surplus come New Year's Day, in addition to their savings. "We love to travel," says Bryan, "so we take whatever is left over at the end of the year and go on a trip."
Stick with cash
When Terry Hopkins quit his job as a construction project manager to become a full-time student, he and his wife, Melissa Hammel, needed a foolproof way to keep spending under control. The couple, who live in Dellrose, Tenn., resorted to a strategy today's plastic addicts might not recognize: They use cash.
Budgetmeisters insist that stashing money in envelopes according to spending categories is a powerful budgeting tool because you can actually see what you're spending. Hopkins and Hammel would agree. For convenience they use checks or automatic bank transfers to make the mortgage and car payments. But they rely on the green stuff for face-to-face purchases, such as groceries, lunch and pet supplies. "When I pull up to the pump for gas, I reach into the glove compartment for the 'gas' envelope," says Hopkins. "It sounds corny, but it's a terrific way to keep from overspending."
The key is being realistic about your expenses and putting enough in each envelope to get you through the month. You can decide later where to cut back, if necessary, says Hopkins.
If you don't like keeping lots of cash around the house, you could set up an online system with Mvelopes, a service that links up with your bank and uses envelope icons to apportion your paycheck and keep track of spending ( www.mvelopes.com ; $10 per month). Mvelopes avoids much of the data entry of other personal-finance programs and gives you a visual cue of how much money you have left in each category. When you're overbudget, the line item turns red.
Cathleen Bechan earns a living dealing with the unexpected: She's an urgent-care doctor in Stamford, Conn. But when it comes to her own finances, she minimizes surprises. Bechan predicts her expenses upfront, and then makes adjustments, if necessary, to reflect what she really spends.
Bechan's finances are straightforward: She sets aside money to pay the rent, electric and telephone bills, and for groceries, emergencies and savings. A surfing fund lets her catch the waves in warm-weather climes such as Costa Rica. She records her actual outlays in a composition book organized by week and periodically compares them with her estimates. "At first, my predictions were wildly different from my actual expenses, but now I'm more accurate," says Bechan.
If a prediction misses the mark, she shifts money from one category to another--an obvious, and appropriate, solution as long as your bottom line stays black. "I see people who look at their budget at the end of the month and say, 'Gee, that was rough,'" says Bryan Clintsman, a financial planner in Southlake, Tex. "The point is to look at it during the month and make real-time adjustments."
Because Bechan lives well below her means, she has plenty of wiggle room. "I'm a conservative person," says Bechan, who paid cash for her new Infiniti, and paid off $30,000 in medical-school loans 14 months after finishing her residency. "I try to save a lot."