Monday, August 2, 2010

Create a Budget: Steps 6 & 7

The first step to financial health is to create a budget. Here are some mini-bites to begin creating a budget that works and you can live with.

6. Add the Negatives
Your basic living expenses have been taking care of. HOORAY! I hope you really took the time to delight in your blessings.

The second priority after basic living expenses are the debts you owe.

I usually hear groans at this point. We sometimes see our debts as these uninvited mosquitoes, forgetting that we at some point thought they were good ideas or would bring enjoyment. It is no fun paying for something we consumed long ago.

Discussing steps to financial freedom, Elder B Wirthlin had this to say about debts:
"(H)onor your financial obligations. From time to time, we hear stories of greed and selfishness that strike us with great sorrow. We hear of fraud, defaulting on loan commitments, financial deceptions, and bankruptcies."

"We are a people of integrity. We believe in honoring our debts and being honest in our dealings with our fellow men."

(Joseph B. Wirthlin, “Earthly Debts, Heavenly Debts,” Liahona, May 2004, 40–43)

President Joseph F. Smith added:
“In the time of prosperity … get out of debt. … If you desire to prosper, and to be … a free people, first meet your obligations to God, and then … to your fellowmen.” (Gospel Doctrine, 5th ed., Salt Lake City: Deseret Book Co., 1939, pp. 259–60.)

I just realized I forgot to address debt when you were listing your categories and their amounts. So, right now, make sure that the amount listed next to each of your debtors is the minimum payment.

"Minimum payment? But --"

Yes, minimum payment. List only the minimum payments, NOT what you have been paying. For brevity's sake, I won't go into the logic at this point. Don't worry. I will cover debt reduction in future posts.

Go through them all: car loans, student loans, payday loans, family loans, credit card balances, medical debts, IRS debt, wherever you owe money. Minimum payments.

Now, how much money do you have left per month after essentials and debts?

This step takes 1-10 minutes depending on how many debts you have and whether you need to look up what the minimum payments are.

7. Zeroing Out

How much money is left in your monthly income after accounting for essentials and debts? If none, I will cover how to account for this in a later post. If some, let's move forward.

The prophets have counseled for decades to spend no more than we earn.

"There may never be a more favorable time than now for most people to get their financial house in order so far as debt is concerned. Yes, let us live within our income. Let us pay as we go. Let us 'pay thy debt, and live!'" (Ezra Taft Benson, “Pay Thy Debt, and Live,” Ensign, Jun 1987, 3)

Third on the list of things to address in your budget is pretty much everything else, "The Extras": luxuries, cable, internet, kids' activities, clubs, services, pets, etc.

THIS IS THE HAAAARD PART because the world advertises to create the lifestyle we want at all costs, even if means putting it on "the convenience" of credit so we can PRETEND to afford the lifestyle we live. Some of us have become adjusted to our current lifestyles, so cutting back to what we can actually afford will feel dreary. But dreariness is that the lifestyle never was ours to begin with. Not that it won't ever be ours, but we desired it and falsified it before the time was right to own it. We were pretending. Now, we have arrived at a crossroad at which we can choose again to live in honesty.

Using an Excel sheet will make this section technically easier, but not necessarily emotionally easier.

Here's the goal: You want to end up with zero.

"WHAT??! And have nothing left???"


Remember, you are already taken care of. You have your essentials covered, you have your debts covered, and you are getting started on an emergency savings account (even if it's as little as $2 a week at this time). With all this in mind, zero is not scary. Create a lifestyle within your means.

"Zero" merely means that every single dollar of your income is accounted for at the beginning of the month, not at the end of the month when you are scrambling through receipts.

1) Start with your income.
2) Subtract "The Essentials".
3) Subtract the debt minimum payments.
4) Subtract "The Extras".
5) The total should be zero.

Here is where the BUTs usually come out.
"But what about my cell phone!"
"But what about TV!"
"But what about date nights!"
"But what about internet access!"
"But what about my kids' karate/ballet/swimming/piano lessons!"
But! But! But!

I'm not saying these MUST be cut out; I'm merely pointing out they are not as important as we make them out to be. Don't let your BUT get in the way of financial peace! We have become so accustomed to certain services and possessions as a regular part of life, that we don't realize they are still luxuries. They are not essential to life or to providing for our families. I know this because there are people all over the world who have not ever had cable, or Netflix, or landscapers, or ballet and they are still breathing, eating, and living.

"But what about paying off my debts!"

You will pay off your debts, but first we must put a system in place to avoid future debt. We're getting there, girl!

"What if my balance is not zero?"

If there's money left over, you will allocate it to something specific. (Determining what that "something specific" is will be covered in the very next post- PROMISE!)

If there's a shortage of money, you will reduce or eliminate something on the budget. (Someone somewhere just panicked.) Here's a hint: You will reduce or eliminate something that is NOT on the Essentials List. A lot of people fall into the trap thinking they can save their premium cable channels by cutting down bare-bones on groceries, but by the end of the month, they "fall off the wagon" and charge a credit card with necessary groceries or with eating out, throwing off their financial goals. Then, they're convinced that budgets do not work for them. (If you're a woman who has on the menu sirloin and lobster every other night, then, yes, common sense calls for a reduction in food spending.)

Depending on your mindset, you may think this step is fun or you may think this is scary. Regardless, it must occur. If this is fun, giggle with excitement the whole way through. If this is scary, think of yourself as the bravest person in the entire world because you are conquering what most people avoid!

OK, it's time to decide where your money will go, where your heart is, and where your treasure will be!

This part can take 10 - 60 minutes, depending on whether you are using Excel formulas to do the running math for you or how attached you are to The Extras.

We're almost finished with creating the budget!
There are two more mini-bites in the "Create a Budget" series.

1 comment:

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