The other day Ben Bernanke, the chairman of the Federal Reserve, testified before congress and stressed the need for our society to become financially literate. As a nation we have a negative savings rate and federal programs meant to suppliment retirement income are in serous financial trouble if things keep going the way they are.
I enjoy finance quite a bit and think it is a key element to being a good steward. Fortuantely it’s not all that hard either, even though it may seem overwhelming at first. Lately, some of my friends have asked me about good financial practices so I decided to write up a few articles on the subject. I doubt I will say anything new or particularly ground breaking; but, I figure if the goal is to raise the financial know how of the country the more sources of information the better.
So that brings me to step 1 in any good financial plan: a budget. Knowing how much money you have and where it is going is critical in planning your future financial success. If you take a stroll your local Barnes & Noble and browse the financial section almost all of them will have a section on good budgeting practices. The way I see it there are 3 steps to a successful budget:
- Creating the plan (knowing how much you expect to make and how much you epect to spend)
- Executing the plan
- And finally, reviewing the plan.
The first step is pretty straight forward. Figure out how much money you have available to you and how much you need to spend. I would suggest only budgetting for items which are required, such as mortgage, electric & gas bills, etc. Other items that are not necessary but nice to have like cable T.V., dining out, etc. can come out of discretionary spending. It’s important not to overcategorize things or it will be much more difficult to keep the budget. A typical Budget May look like the following:
- $1,000.00 Federal and State Taxes
- $1,000.00 Mortgage and associated fees
- $100 Electric
- $50 Gas
- $50 Water
- $400 Food
- $50 Clothes
As you can see only the essential items are budgeted leaving the rest for discretionary purposes. Not too hard, right? The next step is to actually put the budget in practice. Set aside dollars for the budgeted items first and then use the rest for discretionary purposes. You may also want to make a discrtionary budget that is separate from your main budget. This allows you to set hard rules that the main budget cannot be broken but the discretionary is only a guidline.
After you have tried the budget out for a month, you are ready for the final step–review. I believe this is one of the most important components of a successful budget but seems to get the least amount of page time. At the end of the month figure out exactly where you did end up spending your money and make sure you actually met your budget. If you didn’t figure out what went wrong and adjust appropriately. The key part is that the budget balances to 0 or greater, not less. This is also a good time to take a look at how much you are actually spending on certain things. For example maybe you get a $5.00 mocha every day, that’s $150.00 a month which you may not think is necessary. By dropping the mocha you make room for other things that you may find more valuable.
So far we haven’t talked about any kind of savings or investing which I will hopefully get to at some future date but for now I’d say we would all be pretty successful if we had a firm grasp on where we were spending our money and allocating the dollars in a more efficient way than before.