Build A Better Budget : Part 3

I just realized that I forgot about a very important part of creating your budget--the structure!

When you receive income (after taxes), take these steps:
1st -- Pay the Lord.  10%
2nd -- Pay yourself (personal goals). 15-20% is recommended.  We'll talk more about this later.
3rd -- Pay others (expenses).
4th -- Apply leftovers to your personal goals.

If you can learn to use this structure, you are twice as likely to be able to accomplish your goals because you get two chances to put your money towards those goals.  Many people set up a budget like this:

Income - Pay the Lord - Pay others - Pay yourself if there's anything left over.

Can you see what's wrong with this method? If you ALWAYS pay yourself before you pay others, you are guaranteed to meet your personal goals eventually.  If you pay others first, you likely won't have anything left for yourself. If you're still skeptical, here's what L. Tom Perry had to say about this:

"After paying your tithing of 10 percent to the Lord, you pay yourself a predetermined amount directly into savings.  That leaves you will a balance of your income to budget for taxes, food, clothing, shelter, transportation, etc.  It is amazing to me that so many people work all of their lives for the grocer, the landlord, the power company, the automobile salesman, and the bank, and yet think so little of their own efforts that they pay themselves nothing."

CHALLENGE: Always pay yourself 20%.

The FUN Part!

Before you get too much in depth in financial planning, it's time for the BEST part--writing your goals!

I know what you're thinking: "are you kidding me?! FUN?!?" Trust me. 

This is when you can write down all the hopes and dreams you have for your life.  Do you want, say, a big home on a five-acre lot? Write it down!  Or maybe you aspire to own a Land Rover? Write that down too!  How about serving a mission in your older years?  Or taking a family trip to Europe? How about read a new book every month?  These are all things that you should write down as a family.

CHALLENGE: WRITE A LIST OF FAMILY GOALS.

Here's how:

1. Choose your categories.  Examples: Education, travel, hobbies, health, family, church, home, recreation, etc.
2. Write short-, medium-, and long-term goals within each category. Short-term = One year or less.  Medium-term = One to Ten years. Long-term = Ten or more years.
   
3. When writing goals, remember to make them SMART:
• Specific. Not specific: "I want to get in shape."  Specific: "I want to run the Boston Marathon this summer."
  
• Measurable.  It's harder to achieve a goal if you can't measure it and track your progress.
  
• Achievable.  I'm not saying don't dream big, but don't write down "buy a leer jet" unless you really think it's something that you can actually do someday.
• Realistic. Do you dream of flying to the moon? Nice dream, but as it looks now, it might not be a feasible goal.  If some of your goals aren't realistic, you'll have a hard time taking yourself seriously when it comes to other, more feasible goals.
• Time-bound. You're much more likely to accomplish a goal if you set a specific date by which you want to have it accomplished.
4. Review your goals often. Even if you go through all the trouble of writing down your goals, you likely wont' accomplish them if you don't review them often.  Perhaps in your weekly finance meeting with your spouse, the two of you can discuss your progress toward your goals.

Why is goal-setting important when we're talking financial management?

 If you already know what you want to get out of life (i.e. goals), it's much easier to cut out anything that slows you down. 

Weekly Planning Sessions

In The Millionaire Next Door, the author says that people who become wealthy allocate twice the number of hours per week to planning their finances as those who do not become wealthy.  The way they allocate their time is consistent with their intentions of enhancing their net worth.  If you put adequate time into your finances each week, you will be come more self-reliant!

CHALLENGE: Have a scheduled weekly financial planning meeting.

Have it at the same time each week so that you always remember. Your financial planning meeting should include your spouse (even if you are the family "budgeteer", it's important that your spouse know the plan and how you want to accomplish it.  More on marriage and money later).

Things you might include in your meeting:

• What have we spent money on this week?  Is it consistent with our budget?
• Have we paid tithing this week? Have we paid ourselves?
  
• Do we have any outstanding bills that need to be paid?
• Are we working toward paying off debt?
  
• Are we on track to meet our goals?
• How is our retirement savings going (which you should start in your 20's, by the way!)
• Is our investment framework consistent with our investment goals?
• Are our cash accounts balanced?
• Has anything come up that would require an adjustment to our budget?
  

Build A Better Budget: Part 1

Spencer W. Kimball: "EVERY family should have a budget."

I'd say his advice would be good to follow, wouldn't you?

Starting a budget can seem daunting, but it need not be. Here's how to get yourself started.

CHALLENGE: Track your expenses for a month.

You need to know where all your money is going. I think the best way to do this is to use a credit card for ALL my transactions. That way, you can see EVERY transaction online or in your statement. I also like to use Quicken because you can automatically download all your transactions directly from the web, then categorize each transaction. At the end of the month, Quicken will give you a report of the total you spent in each category. Another good program is Money.

The problem with using cash is that you have to keep track of receipts. Also, paying in cash or check is becoming less practical in our world of online payments, automatic bill-pay, etc.

So whether you use Quicken, make your own spreadsheet, or the old-fashioned method of receipt-hoarding, do whatever works for you. Track your spending for the month of January.

Come February, I'll help you start creating your budget. Good luck!