Financial Fast: Budgets and Journal Questions

Submitted by aatkins on February 28, 2012

“A budget is your roadmap to prosperity,” says Michelle Singletary in her book, The Power to Prosper: 21 Days to Financial Freedom.

Why would that be the case? Budgets can keep us from spending more than we need, of course, since they set strict limits on unnecessary purchases. They can also help us save more, since the time we spend creating or revamping a budget is also a great time to deeply consider whether we can increase our savings and investments, and decrease the amount we allocate to unnecessary purchases.

Here’s a “quick and dirty” rundown on how to create a budget, without purchasing a new computer program or app.

  • Figure out your net worth (or the difference between your assets and liabilities):
    • List all of your assets, including cash on hand; banking, retirement, and investment accounts; and the market value of your possessions, including your house, automobile, and furniture.
    • List all of your liabilities, or what you owe on your mortgage, student loans, credit card debt, and any other outstanding debt.
    • Subtract your liabilities from your assets, and you have your net worth! Is your net worth low or negative? Don’t despair—taking the Financial Fast is a great first step. It’s time to figure out how to pare down that debt and pick up your savings and investments.
  • Now, let’s look at your cash flow, or the money flowing in and out of your wallet.
    • Track your expenses for one month. Write down everything you pay, from a cup of coffee to your mortgage payment. You can do this the old-fashioned way, by carrying around a small notebook for this purpose, or you can use an app, such as “ Personal Finance” for the iPhone, iPad, and Android phones, or SplashMoney for iPhones and Mac or Windows desktop computers. Blog commenter Genie recommends The Birdy, as well.
    • At the end of the month, review your spending categories, and make a table (i.e. rent, utilities, groceries, gas, entertainment, dining out, etc.). Include any payments you make to savings or investment accounts, retirement accounts, and credit cards.
    • Now, label your categories as necessary and unnecessary expenses? Necessary expenses are those you must pay, like a student loan or a mortgage.
    • Consider your goals, both short-term and long-term. Do you want to send a child to school, or attend school yourself? Buy a house? Get out of debt? Thinking about your goals will help you take the next step….

Figure out where you can reduce your unnecessary expenses, and put the money you save into a  savings or investment account. Examine your necessary expenses. Could you trim a little more from your monthly grocery bill, or carpool or bike more often to cut down on your gas bill?

NOTE: If you find that your debt is overwhelming or you simply cannot make ends meet, even once your unnecessary spending is down to nearly nothing, then this is also a good time to sit down and consider what you can do to become financially healthy. Can you take on a second, part-time job? Can you sell your car and use public transportation or carpool instead? Could you make space for a roommate, who could pay rent? Have you made all of the affordable improvements to your home’s energy efficiency that you can, to help cut down your energy bill?

It’s been a very long time since I took a look at my budget, so I’ve been ballparking the amount I spend that doesn’t go to necessities. After taking a look at my accounts, I’ve noticed that I’m quite good at ballparking! However, my financial situation has changed since I did my old budget, and it’s likely I could be doing better in some areas of my finances. I’m using the Financial Fast to revisit my old budget and ensure that I’m saving as much as I can.

Here are some journal questions for the week. Feel free to reflect on any of them in the comments section below.

  • Have you ever taken the time to track your expenses and create a budget? If not, what’s stopping you? If you have, what benefits did it deliver?
  • If something unthinkable happened to you, would your loved ones know what to do? Would they be taken care of? If you have a spouse or long-term partner, do you know where his/her important financial information is located? Is it time to have these tough conversations?
  • Do you have debt? How has it affected your life? How would it feel to be free of this debt?
  • One of the two rules of the Financial Fast is to pay for every necessity you buy with cash, not credit cards. How has this been going for you? Does counting out dollar bills when you go to the store make you more cognizant of the fact that your purchases are having an impact on your finances?

See you next Monday for Week 3!

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