Columbia residents don’t need an economist to tell them that food and gas prices are rising: It’s clear at the pump and at the register. But how to budget? Plan for today, and save for tomorrow.
Making a household budget can feel like wrestling with a hydra; there’s always another financial demand waiting to bite you. Budgeting carefully can also feel like giving up freedom, as the desire to buy a new pair of shoes becomes part of an equation. But as Robert Weagley, chair of MU’s personal financial planning department points out, “It’s a whole lot easier to have choice and freedom in your life if you have financial freedom.”
1. Keep your receipts. To budget successfully, carefully collect receipts for a full month so you’ll have a precise record of how much you spend.
2. Categorize expenses. Divide expenses into two groups: fixed and variable. Rent or mortgage payments, utilities, child care, car payments, transportation, insurance and loan payments are generally fixed expenses. Variable expenses include groceries, clothes, dining out, vacations and entertainment. Although fixed expenses can be reduced by consolidating loans, variable expenses are the easiest to tweak on a week-to-week basis.
3. Do the math. Decide on a budget period. Many people create two-week or monthly budgets. Find the total spent each month for fixed and variable items, and in each of their subcategories, then compare that with your post-tax income in the budget period. If expenses are more than income, or if no money is being saved for retirement and emergency funds, cut spending.
4. Think about the big picture. According to the U.S. Bureau of Labor Statistics, in 2006 the average U.S. household spent $48,398. Expenditures were on average divided according to the pie chart. Although there is no truly average household, these percentages can serve as a basis for comparison.
5. Make it a group effort. We don’t like to get less of what we want, and a family budget won’t work if the whole family isn’t on board. “Children are notorious for wanting everything, but they also have a rank order for what they want,” Weagley said. When everyone in a family understands what is being sacrificed and for what gain, a budget has a greater chance of success.
6. Cut back wisely. Cutting back doesn’t mean an end to fun. But gas and food are two of the major expenses that keep climbing, so carpooling and eating in more often are good ways to spend less. “I usually recommend that people track every penny they spend for at least one pay period if they’re trying to tighten up on the budget,” said Brenda Proctor, associate state consumer and family economics specialist in the personal financial planning department, via e-mail. “They usually find that they have a couple of daily habits that cost more than they are worth once they really understand how much they’re spending on them. For many, many families, eating out is a major leakage from the budget.”
7. Use envelopes. Many budgeting experts recommend keeping money in envelopes labeled with each expense category and paying with this cash. While paying for everything in cash isn’t as convenient as using a debit card, doing it for a month gives a keen sense of how money is spent. The most important thing to do is keep track of expenses daily and to gather family at the end of the month to check in on the budget.
8. Build that savings “mountain.” Weagley says 10 percent of a person’s pre-tax income should go into retirement savings. If 10 percent savings don’t seem possible, 5 percent is the absolute saving minimum. Bottom line: save early, save often.