In a personal budget all sources of income are identified and expenses are planned. One way of budgeting originated during the Great Depression. It’s called the envelope system. Basically, for every bill or expense you have you dedicate an envelope to it with the estimated amount written on the front of the envelope. Once you have funds or get paid you put that amount in cash into the envelope. Once the expense is due you take the money out and pay the bill. If you do this for all of your expenses there is no confusion between amounts owed for expenses and other monies in your bank account. Hopefully, by identifying your income and expenses you can also be inspired to save some money for emergencies, or even long term savings goals.

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You may not think it possible especially these days, but some families either by choice or by the loss of a bread-winners job, live on one income. In reality a family living on one income can be more financially stable than one living on two. The reason is if one income is lost due to the loss of a job the two income family would be in trouble, or at least need to make major adjustments until a new job was found. Most two income families live within those means, but have become accustomed to that two income lifestyle and need that income to cover their basic needs like mortgage, loans, and credit cards. A one income family has already made those adjustments. Regardless, the first step is creating and strictly sticking with a budget.

Where things really get interesting is when you have two incomes and continue with two incomes, but budget yourself to live in one. This takes a lot of planning and potentially a lot of cuts, but that’s when you really begin saving and paying off major debts like mortgages.  For most people once you have paid off your mortgage, the rest is very manageable.

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I have been reading today and based on some of my research on my other blog posts, it sparked a question that I wanted to put up here for discussion:

How do you distinguish between your wants and needs?

I know a lot of us feel that some of our wants are in fact needs but what really drives you to know the difference? We had discussed about keeping a journal or diary of your spending for a month or two have you had any success?

Photo Credit: swanksalot

Feel free to comment, I am just trying to see how you stand with your financial goals!!

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Since the economy started doing so poorly, citizens like you and I started saving instead of spending. The actual numbers are that people were saving about 1% of disposable income and that jumped to 5%. Since the economy is returning it has slid to about 3% of income. This economic situation has made people aware of the need for savings. The important question is:

How many of you will only make this a goal for a short time until you feel comfortable with your job situation or the value of your house starts to climb back up?

Paul Flatters and Michael Willmott looked at the above question in “Understanding the Post Recession Consumer”. They conclude that key trends are being accelerated by this recession:

• Consumers demand more simplicity. For example they won’t spend on expensive cars if something simpler will fill their needs.
• Consumers want better corporate ethics. People are upset about the excessive compensation structures at the executive level and seeing no increase in their own salary.
• Consumers are looking for ways to economize in their daily lives i.e. Reduce spending.
• Consumer loyalty is definitely being tested as consumers look for the cheapest deal.  For example, we spoke about name brand shopping vs. store brand shopping in a previous post.

Interesting enough it has impacted a few other areas as well as other trends are slowing:

• Green consumption and charitable giving has slowed. For the time being consumers are not spending more on green products, but this is probably not a long term trend. Once the economy improves concern about the environment will likely return.
• There has been a decline in respect for authority. Government regulators missed most of the scandals (Enron, AIG, the banking Industry) and other Wall Street excesses, respect for the government and authority in general has diminished. Not to mention all the representatives and senators filling their own pockets while not seeming to help Americans find jobs.
• Ethical consumption. Right now consumers are looking for the best deal. The organic, animal friendly, fair trade products are not moving off the shelves as quickly as their cheaper consumerables.
• X-factors have slowed, meaning people are spending less on eco or extreme vacations. There’s just less money to spend for these experiences. Even average vacations have been cut back. The authors expect extreme-experience vacations to be altered for the long time.

I feel for the time being we should save all we can and make wise spending decisions if we follow this advice we will come out of this just fine.

Photo Credit: thms.nl

Have you changed your spending or saving habits due to the recession?

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Well, it is that time of year when we gather our W-2s, tax receipts, and scraps of paper we kept in a shoe box all year long to file our taxes. If you are one of the lucky ones you may even get some money back from the government (not that is good either, since you overpaid the government in the first place, but that is another story).  So what should you do? It is no wonder that tax season happens to fall near the Super Bowl and all the great commercials eliciting visions of flat screens and new cars are dancing in your heads.  But is that the wisest thing to do?

I would like to talk about  three things you should consider as the best way to use that money you get back from your Uncle Sam.

Spend Wisely – Don’t have buyer’s remorse. Plan on your purchases beforehand to avoid impulse buying. You can spend the cash, just make sure it is for something that you will get a return on.  Does the car need some work?  This preventative spending could save you from a huge credit hit if something goes wrong during the year.  Maybe a big stock up trip to the wholesale club for items that you know you will use. This could save you a trip or two later and some cash from the discounts of buying in bulk. And I know how a new flat screen would look, but you have a perfectly good television. Will those extra inches really make flipping channels looking for something to watch on TV that much more enjoyable?  These are just a couple of ideas to get you thinking, but besides spending, you have other choices too!

Save – Yeah I know the title is about how to spend, but an even better use of your money would be to save it.  Don’t just go and put the money in a mayonnaise jar or even for that matter the local bank.  Do some research and find an online bank like HSBC or ING that offers a higher interest rate than you can get down the street.  A variation to savings would be to pay down debt.  Nothing relieves more stress and worries by eliminating debt.  A flush of money could go a long way in reducing some of those credit card bills, maybe even eliminating one or two altogether.  So you could say you are “spending” the money on yourself by reducing debit or you’re creating savings.

The last thing to consider for your income tax return is to Invest. The market, despite the overall malaise of the economy, is recovering.  Take a look at more global investments that don’t rely too heavily on the US economy.  Real estate, is at an all time low, you can lock in a great rate on a 30 year loan. This is a long term investment that is sure to rise over the course of the note.  Also don’t forget about  investing a nice lump-sum deposit into a retirement plan that could help boost it in the long run too.

So if you have money coming back, look at where your money could do the most work for you. Do not get too excited when that million dollar ad  flashes that bright and shiny object in life size grandeur on the flat screen.  Smile cause you know where your money is going and pass the bean dip.

Photo Credit: Jinx!

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Less Consumption

Perhaps the most common way these two processes are related is by consuming less. The basic fundamental associated with both involves using less. The first step to saving more money is to identify places where you can cut back spending. One needs to eliminate any unnecessary spending from their budget in order to create a good source of funding for a savings account. It is simple mathematics. Spending less than your earnings will result in surplus you can save. And spending more than you earn will create a deficit that will put you into debt. It seems simple enough, but unfortunately it is often not that easy to accomplish. It involves breaking a natural habit of spending that has been shoved down our throats through marketing and advertising our entire lives.

The first step to losing weight is cutting out foods that are negatively impacting your diet. Cut out fats, sweets, greasy food, and sugary drinks. It is the same principle as before. Taking in less calories than you burn will help you lose those pounds. But, eating more calories than you use will increase your weight. Just as with spending money, it is a habit you have to break. Consumption has become a part of our daily lives and is a hard habit to break. It is a lot easier to pick up a cheese burger during our lunch break than it is to pack a homemade salad in the morning; not to mention probably tastier as well. Breaking the consumption habit that we are overexposed to is not easy to do and takes a considerable amount of determination and willpower.

Feel Better About Yourself

I can’t describe the joy I felt when I funded my emergency fund during my first year of employment out of college. I managed to accumulate three months worth of income, about five months worth of fixed expenses, through careful planning and diligence. The peace of mind that it brings is really priceless, especially with the current state of the economy. If something were to happen to my car, job, apartment, pets, loved ones, or my well-being, I know I will be able to stay on my feet. I’m looking forward to paying off the new car I haven’t purchased yet. I am already saving for it, and will finance as little as possible. But I know when I get it and pay it off in a very short period of time, it will be an equally great feeling.

Losing weight may bring even more joy because it is a lot more tangible. While it is nice to see the numbers stack up on that bank account, it might be more encouraging to look yourself in the mirror after a few months on a workout plan. It is a lot more evident and perhaps even more rewarding to notice a few less pounds on your belly than it is to put a few hundred dollars into an emergency fund. Appreciating and anticipating this positive feeling will prove to be an effective motivator. This is why many people preach the debt snowball plan. The early victories will provide a morale boost that will get you through the rest of the program.

There isn’t One Solution

Saving money isn’t as simple as taking a portion of your paycheck and putting it into a savings account. While that is a very important part of the process, it is still one piece of the puzzle. In order to be successful at saving money, you need to cover all your bases. You need to monitor your spending habits and identify areas capable of improvement. You need to develop a plan and stick to it for paying off debt. You need identify other possible income streams that you may be able to harness. I work full-time as a Web Developer, but I do freelance on the side. I’ve set up my budget to only include my full-time salary. That way when my freelance checks come in, I can devote it almost entirely into my savings plan. Whether it be my long/short term savings, emergency fund, or some other fund I may be contributing to at the time. Though it would be ideal, one does not need to immediately commit hundreds of dollars each month to saving. In the beginning, it might be appropriate to start off with a reasonably small amount. It is better to test the waters and ease in slowly, rather than diving in and getting lost in the current. By setting too lofty of a savings goal each month you could drown in a budget you can’t keep up with.

The same principle remains true for losing weight. Running all the miles in the world isn’t going to make a difference if you are eating Big Macs for breakfast, lunch, and dinner. One needs to approach losing weight with a comprehensive plan. Losing weight isn’t just about eating right, it needs to be coupled with an exercise plan, that is followed! Start small and work your way into a more invigorating routine. Back when I started my running routine, I went out and ran for a couple of miles until I was too tired to continue. The next day I was sore and my right ankle swelled up like an grapefruit. I had an old bone chip from a previous injury that flared up due to the sudden exercise change. I was sidelined for a week before it healed and returned to normal. When I recovered I adopted a tiered running schedule. I ran for a few minutes, then walked for a few, lowering the walk time every couple of weeks until I was running full time. The plan should ease you into your new lifestyle and not put a shock to your physical or mental well-being.

You Need to Splurge

You might be saying to yourself, wait, why do I need to splurge; isn’t that antithetical? But the fact of the matter is, without some concessions to your plan you might become overwhelmed. Saving every dime not needed for fixed expenses might be ideal, but it is closer to insane. No matter how disciplined you are, you are not going to be able to save every dime possible. While over spending may be linked to a side effect of depression, over saving may be linked to a contributing factor of developing depression. Eventually, you are going to ask yourself: Why am I doing this? What is the point of working full-time if you don’t get the opportunity to spend a little bit of your hard earned cash? The moment this question enters your mind, you will break. It is better to adopt a reasonable plan than an unobtainable one.

The fact of the matter is that you need to treat yourself once every while. The same remains true when attempting to lose weight. You can’t cut all of your guilty food pleasures at once, lest you find yourself quitting soon enough. My mother has been a successful user of WeightWatchers and has lost over 45 pounds. Once a week, usually on Saturday, she would go over 15-20% of her daily allotment of points. She doesn’t go out and eat a chocolate cake and some Big Macs, but she does indulge herself in a cookie, a soda, or a few glasses of wine. It is about controlling your splurges. People who become overweight or bankrupt lose sight of their splurges. They splurge so often, it isn’t splurging anymore, and it becomes apart of their natural habit. Take that vacation or birthday dinner, just make sure it is well within your means and is accounted for in your overall plan. Plan, monitor, and most importantly, make sure you enjoy your seldom splurges.

Healthy Eating

A lot of saving money has to do with identifying trends and addressing them. By identifying and addressing a habit you can stop it in its tracks and direct the money it consumed into savings. More often than not, these trends are going to be related to food and drink consumption. I hate to reference Starbucks, but eliminating that caramel frappachinomochaexpressolatte you order every day on the way to work will save you $5 a day. Not only will you be freeing up money to save, but you will make a healthy change in your diet. The same can be said with eating out. A lot of money is being wasted by eating out when you can cook for yourself for a fraction of the cost. Again, this will help improve your diet; restaurants are concerned with making tasty food, not healthy food. Having direct control over what you put in your food will result in a drastically healthier meal.

Take a look at your drink consumption as well. Do you buy big packages of bottled water? You can save substantially by switching to a water filter/purifier. Not to mention your also being green! Sodas are also an un-needed expense, and they are terribly bad for you. Alcohol could also be a huge money sink. Can you survive the week without that 12 pack? Combat your beer belly by cutting back and save money in the process. If you still find yourself eating out, avoid ordering alcohol. Alcohol is marked up on average by at least 200% of its retail value, sometimes even more. A few glasses of beer or wine could cost you more than the actual meal you ordered. Don’t even get me started on those girly drinks. Not only do they almost cost much as a meal, but they have just as many calories too.

Photo Credit: nasmac Stephen Baudy leapif.geo

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I will never forget the day that I saved $203 using grocery coupons and taking advantage of store specials.  Although it was four years ago, I remember it like it was yesterday.  I was on a mission -I walked into the store prepared with the week’s grocery ad and matching coupons for the items on sale already clipped and separated.  I went up and down the aisles, buying the items I had matched with my clipped coupons.   (This particular store also had several Buy One Get One Free specials and doubled coupon face values, which added to the savings).  The total for a cart full of food was…

…$63, even the clerk was surprised.  She handed me my receipt with my savings circled at the bottom I literally got goose bumps.   Some people may think getting goose bumps over coupon savings may be a bit silly but it is such an exhilarating feeling to know you are saving money!

This was also the day that I decided to do something creative with the money I was saving from every grocery shopping trip.  At the end of every month, I transfer the amount I have saved in coupons for that month into a savings account that I opened for this purpose only.  Coupon and store specials savings are usually totaled at the bottom of the receipt so it is really easy to add up the savings.

Once a year, I withdraw the money in the account and use it as spending money on my annual vacation trip.  I have been doing this for four years and to date I have saved over $2,300.   When I have children, I plan to replace the vacation account with a college savings account.

Photo Credit: bredgur

I am anxious to see what other people are doing with their coupons savings so please feel free to share your ideas!

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Step 1

Budget Savings FIRST!

The beginning of a new year is the perfect time to create a new budget. A budget allows you to understand where the money goes and will enable you identify areas where you can free up cash for important savings goals, such as college and retirement. Consider your budget to be your blueprint for where your money goes each month.  Stick with your blueprint and you will have shelter when a storm comes.  The foundation of any good budget starts with savings.  Once you have established that foundation of savings you can build the rest of your expenses.

There is no better time than the present. A budget can be as simple as your expenses and income written down and stuck to the refrigerator, or as detailed as a spreadsheet in a money software program. The key is to commit it and commit to it.

To keep using our building metaphor, your first project in building your shelter is to identify income or the money that comes in the door.  Once you establish what you have to work with you can set your budget so you don’t spend more than what is coming in. The next important aspect to your budget is expenses.

It makes absolutely no sense to create a budget if you don’t know where your money is going. Take a month or two and track your expenses. Save your receipts and record all your expenses into a journal. If you are technology savvy, it might be a better idea to invest in software. Mint.com is an online personal finance system that will automatically track and categorize your expenditures. Identify a tool you are comfortable with and stick with it to make sure you know where your money is really spent. A realistic budget is much easier to follow than one that has no flexibility.

Time to analyze your expenses. Now you know where your money goes and it might seem like there is no wiggle room. But without paying yourself first there is no hope for savings unless you can foresee a winning lottery ticket in your future.

The hard part is looking at your discretionary income, the money that is not for food, shelter, transportation or other essential items and finding alternatives.  Let’s say you eat out for lunch three times a week at $7 a lunch. If you could pack lunch each day at $4 a lunch, you are saving $9 per week or $36 per month or $432 per year.  Poor Starbucks gets a bad rap in these articles, but if you are spending $4 – 5 on a cappuccino everyday, try bringing a thermos from home.  It could save you up to $20 per week or $80 per month or $960 a per year. That is money that could be working for you and earning interest!

So it is January of 2010, you have a basic shelter and your blueprint budget is working, however, you have started thinking about your plans for the future, whether they are for retirement, your children’s education or that dream vacation.  Once you start putting your savings first you may even move that item over to the essentials list, you don’t even have to call it savings.  Think bigger, then you re-visit your budget as time goes on and salaries and  living arrangements change, you might be able to reduce expenses again.  Thus allowing more savings for a bigger and better dream.

Let me know if you have any tips for reducing expenses, I am always trying new things…….but start with a budget and see how far you can go!

Photo Credit: Will Sculin, Giles Douglas

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I have seen this before as it has been floating around the internet for years, some financial advisers even use it when they are discussing and establishing Savings accounts for their clients. It is a philosophy about your psyche – savings is just like going to the gym – to make you feel better and how you project yourself to the world. Enjoy - Rich

Saving for Greatness

Author Unknown

Savings, believe it or not, can affect the way you stand, the way you walk, the tone of your voice – in short, your physical well-being and self-confidence. A Person without savings is always running. They must. They must take the first job offered, or nearly so. They sit nervously on life’s chairs because any small emergency throws them into the hands of others.

Without savings, a person must be too grateful. Gratitude is a fine thing in its place. But a constant state of gratitude is a horrible place in which to live. A person with savings can walk tall. May appraise opportunities in a relaxed way, have time for judicious estimates and not be rushed by economic necessity.

A Person with savings can afford to resign from their job if their principles so dictate — and for this reason they will never need to do so. A person who can afford to quit is much more useful to their company and therefore more readily promoted. They can afford to give their company the benefit of their most candid judgments.

A Person with savings can afford the wonderful privilege of being generous in family or neighborhood emergencies. They can take the level stare of any person … friend, stranger or enemy. That ability shapes their personality and character.

The ability to save has nothing to do with the size of income. Many high-income people spend it all. They are on a treadmill, darting through life like minnows

The dean of American bankers, J.P. Morgan, once advised a young broker: “Take waste out of your spending; you’ll drive the haste out of your life.”

If you do not need money for college, a home or retirement, then save for self-confidence. The state of your savings does have a lot to do with how tall you walk.

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