Finance Matters

Posts Tagged ‘budget’

Obama is about to deliver his third State of The Union address. 

It’s an election year, so the expectations are pretty low on substance. Expect soaring cliches, a few wedge issues, and a electioneering. We may get a preview of the type of campaign Obama plans to run. 

Obama is delivering this exactly 1000 days since the Senate has approved a budget, which has meant a series of continuing resolutions and a crisis mode whenever the money is running out. 

We’ll be live-blogging it here. 

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See Also:

• Did Romney’s Mormonism Doom Him In South Carolina?
• The GOP Nomination Is Now A Horror Movie: Newt Gingrich Just Refuses To Die
• NEWT’S SOUTH CAROLINA SMACKDOWN: Here’s What Happens Next

Many of the reader questions I get here at Get Rich Slowly follow a familiar formula. The person sends me a breakdown of her income and expenses, also sharing how she’s allocating her savings. From these figures, my correspondent wants to know if I’d make changes to her budget.

Unfortunately, I’m not qualified to answer questions as specific as these. (And I don’t have time to answer them all!) That said, there are often certain themes, such as: “Am I saving enough?”

For instance, Kailey wrote recently with the following question. To me, it’s clear she’s saving plenty — but how should she allocate what she saves? That’s the question. Here’s her e-mail:

I’m 25 and about three years into my professional career. I’m pretty diligent about savings and contributing to my 401(k). Of course, I never feel like I’m saving enough, even though I’m fairly confident that I save much more than many of my peers.

One-third of my income goes directly into my ING account for my emergency fund (which is fully funded for approximately one year of living expenses) and now is being used to accumulate money for a down payment on a house/condo. Unfortunately, I live in Southern California, and in an area where that 20% down payment doesn’t seem to be within reach in the next couple of years. In addition to the 33% of my income being directly saved, I also contribute 8% to my 401(k). This 8% allows me to take full advantage of my employer’s generous matching contribution each year. I also have an automatic annual 1% increase to my 401(k) contribution.

The problem lies in that I never feel like I’m contributing enough to either my savings or my 401(k). How many GRS readers actually max out the federal contribution limit of $16,500? I don’t feel that this even seems realistic or attainable on a decent life style. And is it really a good idea to increase that amount by significantly decreasing the amount going into my savings each month?

Taking advice from GRS, I opened a Roth IRA a few month back with $3000 of the $5000 limit. This definitely increases my percentage of income saved. However, it would still be interesting to hear other readers percentages and/or thoughts on my progress given my age.

First of all: Wow! Kailey is saving almost half of her income. That’s awesome. Although she’s fretting over how to maximize her money, I think she should congratulate herself for what she’s been able to do at such a young age. If she continues down this path, she’ll be in great shape twenty years from now.

So, Kailey’s problem is a good problem to have. But if you were in her position, it’d still be a problem. How much should she save for the near future? How much should she save for retirement? These sorts of decisions can be perplexing, and unfortunately, there are no easy answers. Because we can’t know the future, we can’t know what the best choice is for our individual circumstances. Instead, we have to make best guesses based on who we are and what our goals are.

That last part is important. I always preach the praises of conscious spending — the notion that we should spend lavishly on the things we love while cutting back ruthlessly on everything else — but I think there’s something to be said for conscious saving also. (In a way, this is why I’m a fan of targeted savings accounts.)

When you have specific goals, goals that mean something to you, you’re much more motivated to save. If I have a trip planned, I’m more diligent about saving than if I’m saving for some undefined future, for instance.

In Kailey’s case, it sounds as if buying a house is important to her. That’s a good goal, and it will help keep her motivated to save. If I were her, I’d stay focused on that. She’s already putting 8% of her income into her 401(k), plus $3000 a year into her Roth IRA. That’s a good start, and if she can maintain those contributions as she saves for a home, I think she’ll be fine. Then, once she’s accumulated enough for a down payment, she can attack her retirement saving even more aggressively.

Really, though, I don’t think there’s any one right answer in this case.

What do you think? If you were in Kailey’s position, would you save more for retirement? Would you save more for the down payment on a house? How do you find a balance? And, at the same time, how do you make sure you’re not depriving yourself in the present?

We all have the friend or family member who can’t seem to grasp the idea of budgeting. It can be difficult to intervene and teach simple budgeting skills without breaking the bond of friendship.

We’ll outline the ways you can teach budgeting by creating an expense report, cutting those expenses down, and then help them monitor the budget.

We’ve covered our fair share of budgeting tips and they’ve ranged from using webapps to track spending to using envelopes for cash.

Here, we’ll look at how to intervene in your friends financial business and how you can guide them through creating an expense report with hands-on techniques. Once they have a good idea of their expenses, you can walk them through the process of cutting those expenses down with webapps, ditching unnecessary services, and lowering the cost by calling all their providers.

How to Handle the Budgeting Intervention

A budgeting intervention is almost as difficult to bring up as a drug intervention. While many of your friends and family might need your help, many might not be interested in it.

It’s not required that you handle the intervention as carefully as say, a heroin addiction, but you still need to follow some basic rules for bringing up and handling the subject. For an intervention, Mayo Clinic recommends doing your homework ahead of time, which in this case means coming up with a plan so you’re able to talk about and work a budget on the spot. If you have the time, don’t wait, it only takes a few minutes. It’s also recommended you stay on track the whole time. Don’t veer off into gossip or conversation and move the discussion somewhere that feels more like a formal meeting place so you can get the job done.

In my experience, I found it best to wait for them to open the discussion when they complain about not having any money. For instance:

Them: Man, I’m short on rent again this month.
You: Really, why?
Them: I don’t know, I just don’t have enough money.
You: Have you ever tried making a budget? It’s super easy, let’s do it right now.

I’m no financial expert by any means, but teaching ends up being as much a learning experience about your own budgeting as it is about showing someone the ropes. If you’re excited about it, they might be as well, and it’s not too difficult to make it an enjoyable experience. Most of these tips can be applied to any age group because at its core, the idea of budgeting is a simple one: make sure you have more coming in than going out. The trick is finding a method that someone will actually stick to.

Teach Them How to Make and Understand Their Own Expense Reports

It’s a good idea to consider the type of learner you’re attempting to teach budgeting. It might sound a little like elementary school, but if you want to make it an enjoyable experience you have to show them how to do it in a way they’ll understand and actually implement in the future. This might mean you need to use visualizations or speak clearly about everything you’re teaching them. Basically, you need to teach the budgeting in the same way you would to a child, but use grown up language. The biggest thing to remember is that you’re not setting up a budget for them. You’re guiding them through doing it. The basics are always the same: you can’t spend more than you earn, but the methods are going to change from person to person. The overarching goal is to minimize expenses and learn to save, but the first step is to get a better view of what you’re working with. You may find doing the initial expense sheets by hand instead of using a web or software service works better to lay down the foundation. Here are some ideas for doing it.

How to get the numbers: The most difficult and time-consuming part of making a budget is tracking down all the numbers and expenses you need to correctly make a budget. Monthly bills should be easy enough, but they’ll need to take a look back at their monthly expenses on groceries, gas, and other random charges to properly get an idea of average expenses.

If you’re teaching someone more technologically inclined, they can use a service like Mint to get a quick breakdown of the monthly expenses without a lot of work, but doing it by hand might work better for people new to budgets. One way they can do this is to print out a couple months of their bank statement and then highlight the different types of expenses with different colored highlighters. For instance, they’d highlight all the bills in red, entertainment expenses in yellow, and transportation in blue. This gives the whole thing a more tactile feel and while it takes a little longer, it can embed those expenses in their memory a little better than having a service do it automatically.

• Write Out a Simple “In and Out” Expense Sheet
  If you’re working with someone who doesn’t have a lot of complicated finances but needs to get a good gauge on where their money is going, a simple two-table list might be a good way to go. Have them round up the expenses they categorized above and make sure they’re being honest with the numbers. At this stage, there’s no expense that should be left out, no matter how embarrassing or trivial it is.
• Start by listing out all monthly expenses in one column, with the other dedicated to the average monthly paychecks.
• Compare the two and make sure they’re not spending more than they’re bringing in. If they are, we’ll go over some ways to cut your spending down in the next section. If money is left over, they’re in good shape, and we’ll figure out how to deal extra cash in a little while
• Put the list somewhere it will be visible every day so it can be seen, remembered, and understood.
• Graph the Expenses for a Visual Guide
  If you’re working with someone more artistically inclined, you might consider teaching to his or her strengths. For budgeting, this includes graphs and pie charts. With all of the data they collected in the above steps they can do this pretty easily.
• To figure out your percentage, divide the expense by the total monthly income. For instance, if you’re paying $60 a month for internet and you make $1500 a month, you divide 60 by 1500 and get four percent. Do this for each of the monthly expenses. If on average there is money left over, put that in its own category.
• Now you should have a set of percentages that up to 100 percent, so it’s time to make a pie chart.
• The chart doesn’t need technical accuracy, it’s more about the act of drawing it. For a pie chart, they can estimate the size of each slice. Have them color everything so it’s nice and clean looking, and then hang it up somewhere noticeable.

Figure Out Where and How to Cut Expenses Realistically

Now that the current spending habits are in front of them, it’s time to figure out how to cut expenses. This is going to depend on where their money is going, what type of entertainment they like, and how close to their limit they are each month.

To start, figure out if any money is getting wasted away. Take a look at all those discretionary purchases each month individually and see if you can find a trend. Often, it’s as easy as noticing the $150 spent on coffee every month at a coffee shop instead of making it at home. Perhaps they have some monthly purchases that go to waste but are kept because they’ve always been there. Cable is often a good example of something that might only get used to watch a few shows but could easily be replaced with cheaper services. We’ve outlined how to ditch cable before, and it’s a good way to quickly get rid of a expensive and underutilized service. Other common expenses include:

• Alcohol
• Restaurants
• Gas
• Groceries
• Entertainment
• Phone
• Insurance

To reduce the cost of expenses, you can make a few sacrifices, or spend some time on the phone with service providers to get them to lower costs. Services like BillShrink can be used to find cheaper gas, wireless service, and television. To cut the grocery and restaurant bill, consider our previously mentioned tips to start eating well at home while keeping shopping costs down. If they’re more the type to spent money on movies, books, or video games, discretionary spending on entertainment is one of the easiest to curb. If they’re a big gamer, consider our tips for selling off used games at the best price, or using rental services like Redbox or GameFly. If they spend a lot on purchasing movies all the time, Netflix or Blockbustermight be the way to go. For books, the easiest solution is the local library, but a good used book store works just as well. The important thing is to stress that it’s possible to keep up the entertainment habit without breaking the bank every month. If they are one of the avid collectors that will purchase everything despite their financial situation, stress the importance of cutting in other places in order to do so.

Once expenses are cut as low as possible, they need to figure out what type of savings they need. If no potential vacations, credit card repayments, or big purchases are on the horizon, that money should go into an emergency fund to help pay for any unexpected expenses that may come up. If you’re dealing with a person who seems to hate saving, remind them of a recent emergency like a car repair or medical bill they’ve had to pay out of pocket.

Now they should have an optimized budget, where expenses are cut, the bills are as low as they can be, and it’s as close to breaking even as possible. To show off a little, have them redo the expense sheets highlighted above to get a better idea of what has changed. Now it’s time to figure out how to use those numbers and keep the budget on track in the future.

Three Easy Ways to Keep Them On Budget

Figuring out where the money is going and finding ways to cut expenses is only half the battle. The next part is figuring out a way to keep them on the budget. When they’re starting out, a lot of people like to keep their monthly expenses on a wall where they can see them every day as a reminder. One person I talked to recently did so while surrounding their budget with pleasant images and quotes so it wasn’t such a downer to look at it. A lot of different ways exist to track a budget, but lets look at the simplest forms for beginners with simple expenses. These are easy, month-to-month style budgets for people who aren’t dealing with capitol investments or large oncoming expenses. They’ll need to tweak the methods over time to fit their lifestyle, but these will start them with a strong foundation to build on.

• Envelope Method: If you’re teaching budgeting methods to someone who is more comfortable with cash than a card, the envelope method is one of the simplest to follow. This method involves coming up with specific categories and stuffing the budgeted amount of cash into that envelope. For instance, a monthly set of envelopes might include: food, entertainment, gas, and emergency. Some expenses like rent, utilities, and bills can’t be paid in cash, so this only works for people who might struggle with their discretionary spending. In this example, you would help them come up with their proposed monthly budget, then hit up the bank and take out the cash. Each envelope gets filled with the budgeted amount and that’s all that can be spent for the month (or week or bi-weekly, whichever they prefer). It’s as easy as that. When the envelope is out of money, the spending needs to stop.
• Webapps and Software: A lot of different methods for tracking a budget on a computer exist and we’ve highlighted the best before. For complete beginners, we rather like Mint for this, and our guide to setting up and tracking your spending is a good place to start. Mint’s mobile apps and reminder system are good for those new to budgeting because they’ll get alerts when they’re close to zero dollars or when a strange expense comes up.
• Multiple Bank Account Budgeting: We’ve talked about the idea of bucket budgeting with multiple bank accounts before, but it’s a really handy tool for those who are struggling to make their bills each month. Basically, set up two accounts, one for fixed expenses and one for everything else. This helps ensure the rent and bills will always get paid first and the rest of the spending can be doled out as needed. It’s good for budgets that need flexibility or for people who just got a lump sum payment like a student loan or insurance payout. While the idea revolves around a checking account and two saving accounts, it could also be worked as two checking accounts. One account goes to bills and you deposit money in at the beginning of each month, while the other goes to the rest of the expenses. It takes a few steps to transfer money, so impulse purchases won’t be as easy to make. Once the budget is in order, another account can be used as a savings account as well.

This post originally appeared at Lifehacker.

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See Also:

• MEGAN McARDLE: You Can’t Beat The Market, So Learn How To Save
• The Craziest Things People Did This Year To Save Money
• 5 Budget-Friendly Champagnes For Your Ritzy New Year’s Eve Toast

Last year’s decision to tie public sector pensions to the consumer prices index (CPI) rather than the retail prices index (RPI) will result in pay-outs being reduced by over 17 per cent over 15 years, according to the TUC.

In 2010 the government decided that pensions would rise in line with the CPI, which increases more slowly that the RPI, as part of its efforts to save money.

The change took place in April 2011, when those receiving a public sector pension received an increase of 3.1 per cent, rather than the 4.6 per cent they would have received if the RPI measure had been used.

As part of yesterday’s Autumn Statement, the Office for Budget Responsibility (OBR) released revised figures estimating that the gap between the RPI and CPI measures will widen from 1.2 per cent to 1.4 per cent a year.

This would save the government 17 per cent, compared with the amount it would have to pay out if public sector pensions were linked to the RPI.

The OBR estimates that by 2016 the gap between CPI and RPI could reach 1.8 per cent, with the CPI falling to 2 per cent by this date, and the RPI falling to 3.8 per cent.

The government’s decision to switch from RPI to CPI has been challenged in the High Court by several public sector trade unions but a decision has not yet been reached.

Public sector pensions were on everyone’s mind yesterday, when up to two million workers staged a 24-hour strike over further changes to pensions, leading to schools being closed and hospital operations being cancelled.

Today the government said it is committed to reaching an agreement over public sector pensions and the Department of Education is meeting with teaching union representatives.

Under the proposed changes, public sector workers’ pension contributions would increase and they would have to work longer before being eligible to take their pension.

President Obama has warned that the average American family will pay $1,000 more in tax each year, unless Congress backs his budget plans.