Hans Kasper MS-CPA PS

Budgeting and Personal Money Management
 

The following link will take you to a good personal finance web site.

http://www.daveramsey.com/

Budgeting of your personal finances is something no one does but everyone should.  Let's look at Chuck's story.

First I created a budget for my personal expenses.

• Determine your expense categories by selecting from the following.

  • Auto

    • Loan or lease payments

    • Gas

    • Repairs

    • Insurance

  • Children

    • Allowances

    • Childcare

    • Babysitter

    • Child support payments

  • Commuting costs

    • Train passes

    • Bus passes

    • Subways

    • Tolls

    • Parking

    • Taxi

  • Credit Card payments

  • Education

    • Tuition

    • Room and board

    • Books

    • Other school related expenses

  • Food

    • Groceries

    • Drugstore expenses

    • Take-out meals

    • Cosmetics

    • Restaurant meals

  • Gifts

    • Charity

    • Gifts to friends and family by person

    • Christmas

  • Health

    • Vitamins

    • Non-reimbursed medical visits

    • Non-reimbursed drugs

    • Health club dues/at home equipment

    • Medical and dental insurance

  • Home

    • Repairs

    • Lawn care

    • Cleaning

    • Pest control

  • Insurance

    • Life

    • Disability

    • Long-term care

  • Miscellaneous

    • Miscellaneous cash

    • Alimony or maintenance

    • Retirement contributions

    • Savings account contributions

    • Investments

  • Mortgage real estate taxes and home insurance

  • Personal care for each member of the family

    • Dry cleaning and laundry

    • Tailoring

    • Shoes

    • Cloths

    • Hair

  • Pets

    • Vet bills

    • other pet items

  • Recreation

    • Vacations

    • Timeshare dues and loan payments

    • Movies and theater

    • Parties at home

    • Books, magazines, newspapers

    • Country club and social club dues

  • Utilities

    • Electric

    • Water

    • Gas heat

    • Garbage

    • Phones.

  • Others not listed

   

• Determine how much you spend on or want to set aside into savings monthly for each expense category by reviewing prior expenses in those categories and writing the amount next to each category in the list.

• Total this list and compare it to your monthly take home payroll checks.  If the expenses are more than the take home the you need to cut back; if less than then put that amount to savings.

• Since almost everyone has a computer today buy the Quicken program and learn how to use it correctly.  Input your budget into the program.  Start using the program and monthly use it to compare your spending to your budget.  Cut back when your are overspent on a category.

Immediate Goals:

• I planned to start paying for my expenses by cash or by check and to stop using credit cards so I could stop going further into debt.  I didn't cut them up; instead I put them in my dresser drawer; a bank safety deposit box will do a good job too.  I kept them in case I had to use them for an emergency a real one not an impulse one.

• I planned to begin controlling my expenditures and start living within my budget so I could begin paying off my debts with any excess money I had.

• I planned to start working a second job at nights or on weekends.  I designated 50% of the extra income specifically for the payment of my debts.  The other 50% I would use to put breathing room back into my living expenses and savings.

• I planned to review my home and auto insurance to see if the coverage was adequate.  What a terrible loss I would have if I lost these assets and they were under-insured or not insured at all.  Who would pay off the loans I had on them?

• I planned to review my life insurance and purchase extra if needed so that my debts would be paid off in case I died.  Then my family would not have to face bankruptcy without me.  I also planned to review my medical and disability insurance.  This would protect me in case I became ill and couldn't work for an extended period of time.

• I planned to pay off all my past-due debts and past-due utility bills at the amount of $50 per month.  The extra money to accelerate these payments would come from my second job and would be allocated as follows:

  • First I would pay off my past-due auto loan so that my cars would not be repossessed.

  • Second I would pay off my past-due utility bills so my services would not be turned off.

  • Third I would pay off my past-due credit card balances starting first with those which were most past due.

Goals for the Next Two Years

• I planned to pay off credit card debt down to "affordable levels".

  • First I would pay off major credit cards down to one-half of their credit lines so that I would be able to use them in case of an emergency.

  • Second I would pay off the debts in the order of the smallest balances.  This would allow me in the shortest time possible to cut out of my budget their required monthly payments which could then be applied to other debts or be used to supplement living expenses.

  • Third I would pay off the remaining debts starting with those having the highest interest rates.

• I planned to review my life insurance and purchase extra so my family would have extra to live on in case I should die.

Goals after Two Years

• I planned to begin saving where my money would be safe with little or no risk for an emergency fund in case I lost my job or became disabled or ill.

• I planned to begin savings for a replacement fund in case the car a household appliance or something concerning the house needed to be replaced.  This way I could pay cash for those items and not pay all that interest by financing the purchase.

• I planned to pay off all credit card debt if full.

Long-Term Goals

• I planned to begin saving so my emergency fund would be equal to six months take-home pay.

• I planned to begin saving for my children's college education.  Although I might not have everything covered at the time they entered college I felt that something was better than nothing and one year was better than one month.

• I planned to begin preparing for old age by saving for a retirement fund.  This was so I could have something set aside for a period in my life when I would not be working for an income.  Again although I might not have everything covered at the time I retired I felt that something was better than nothing and besides I didn't want to be a burden to my kids unless I had no choice.  I believed i was making that choice now by getting out of debt.

• I planned to begin paying off my home mortgage faster than my standard monthly payments.  This would save me all kinds of money (interest payments) in the long run.

The designation of a budget item as a Cash item meant that I wanted to control the amount I spent by spending only the cash monies and not monies out of the checkbook.

I found the only way to control these monies was to separate them into individual envelopes.  I found that regular mailing envelopes do not work.  I had to go to the local office supply store and buy 6.5 inch by 3.5 inch coin or currency envelopes with an end flap.  These envelopes are perfect for this purpose since they are designed to easily hold both coin and currency.

I marked these envelopes as:

• Food Week 1

• Food Week 2

• Auto Gas Husband

• Auto Gas Wife

• Clothes Husband

• Clothes Wife

• Clothes Children

• Allowance Children

• Entertainment

• Miscellaneous

The methods I used to control each category are as follows:

Food:  I broke up the money into two envelopes one for each week.  This method allowed me to avoid overspending in the first week and falling short in the second week.  If I got to the checkout counter and the bill exceeded my budget I would give some of the items back to the checker to reduce my bill.  Furthermore I only went shopping once a week and I stuck to my list when I bought.

Auto Gas:  I broke up the money into two envelopes one for myself and one for my wife.  This method allows my wife to avoid getting into trouble if I overspend or vice versa.   If one of us does need to overspend we can discuss it and take the needed funds out of another envelope. 

Clothes:  I broke up the money into three envelopes one for myself one for my wife and one for the children.  This method does not allow anyone to overspend on clothes.  If a sale comes up and I can save money (which is good for the entire family) on a particular item and I do not have enough money to cover the purchase I can go to my wife and borrow the money from her with an IOU for the amount to be repaid out of future paychecks. If she doesn’t have the money then I do not purchase the item.

Allowance:  I gave my daughter an envelope to keep her allowance in.  This method allows for the money to have its on special place and not get lost.  However she thought the envelope was tacky and chose instead to use a wallet which would achieve the same purpose as the envelope.

Entertainment:  I put the money into one envelope.  At the beginning of each budget period our family sits together to decide on what the entertainment money will be spent on and then we stay within the budgeted amount. 

Miscellaneous:  One envelope was allotted for cash purchases of a small dollar amount which do not fit into the above categories.  Miscellaneous spent from checking is for items with a larger dollar amount; you get to pick the dollar amount.  When I run out of money in this category I simply don’t purchase anything until the next paycheck no matter how badly I need the item.  I have disciplined myself to wait.  It may be a good idea to separate miscellaneous into two envelopes; one for the husband and one for the wife.

Please notice I did not keep any receipts for “what the money was spent for” in any of these categories—no accounting at all no lists on the refrigerator and no ledger books.  When we ran out of money in an envelope I didn’t ask where it went; I just stopped spending.  This avoids pointing fingers or jumping on the other person for overspending. To do otherwise is counterproductive. 

If I do not spend out of the check for these items then by spending for them solely out of the cash envelopes I will not overspend my budget.  

 

Top of Page This page was last updated on 05/13/2010