This is the first post in my series, “A Family Guide to Living on Less“.
photo credit: Antishay Ventenne
Assessing Your Financial Situation
There are people out there who actually plan how their paycheck will be spent. Their money is carefully allocated to bills, savings, and other expenditures, and are records are meticulously maintained. On the other hand, there are people whose idea of money management consists of piling all incoming bills in the same place on the kitchen counter with the hope that someone will pay them before they’re due. Most people fall somewhere between these two extremes. Generally, we know how much discretionary money is available each month, live within our means, and plan to start saving soon, maybe within the next year. Most people don’t follow a strict budget and most Americans are poor savers. However, those days are now behind you. If you have never budgeted before, now you must. This means that every penny has to be accounted for and spending it must be a calculated undertaking.
Begin by Looking in the Past
photo credit: Life Organizers
The best way to get a handle on your spending is by reviewing what you generally spend. Start by taking a look at the last six months. Go through your checkbook register, your credit card bills, and receipts, and organize and account for all your expenditures to the best of your ability.
There are several objectives to doing this. First, it will help you see where “fat” can most easily be trimmed. Once the easy stuff has been cut out, then the “squeezing” begins to help you save every penny possible.
Second, categorizing your expenditures will help you see what your priorities have been, regardless of whether or not you recognize them as priorities. What’s important is that now you now where your priorities lie, forewarned is forearmed!
The third objective is to let it help you construct a monthly budget that covers the essentials. You have to determine how much money is necessary, per month, to continue living where you do.
Categorizing your expenditures will be most helpful if you keep your categories specific. Instead of food, break the category down into groceries, restaurant meals, fast food, lunches, etc. If you buy nonfood items at the grocery store, estimate what percentage of each grocery bill is food and what is nonfood, and put these amounts in separate lists.
Every family will be different, but here is a list to get you started. The first is the general category and some possible subcategories. Modify as you see fit.
- Food-groceries, restaurant meals, fast food, lunches away from home
- Entertainment-movies, concerts, theater, parties, videos, CDs, games requiring tickets, computer games, cable TV, books, newspaper/magazine subscriptions
- Recreation-sports, music, art, club fees, equipment, lessons
- Clothing-per person in the family, dry-cleaning costs, special sports clothing
- Toys/Gifts-birthdays, major holidays, miscellaneous
- Utilities-gas, electric, water, phone, sewage, garbage
- House maintenance-supplies for inside and outside, yard service, cleaning service, home repairs, appliances
- Major purchases (Home)-remodeling, landscaping, furniture, home computer, audio/video equipment
- Transportation-per person costs or per vehicle costs such as lease payment, gasoline, repairs, maintenance, licenses, parking costs, etc.
- Personal indulgences-alcohol, cigarettes, gambling
- Personal care-cosmetics, haircuts, tanning salons
- Pets-per pet
- Child care-per child
- Education-per person: tuition, books, supplies, transportation
- Medical/Dental-deductibles, co-payments, prescriptions
- Credit card interest/fees-per card
- Banking/Financial Services
- Nonmedical Professional Services-accountant, lawyer, etc.
- Mortgage/Lease/Rent-separate out costs of insurance and taxes if an escrow account is part of the monthly payment
- Insurance-car, life, medical, dental, homeowners, disability, long-term care
- Loans-auto, installment, personal
- Taxes-local, state, federal
photo credit: Queercents
If you do this on separate sheets of paper, you are going to have a lot of sheets. That’s OK. Staple the different subcategories together and the pile will seem more manageable. It’s important to get this level of detail. The effort will pay off in the end with the amount of information you’ll discover in this process.
Some may prefer to do this on a computer, but don’t go buy any software, it’s not worth the expense!
Once you have most of the expenses in the last few months allocated to the different lists, it’s time to do some serious thinking about the differences between wants and needs.
Stay tuned for the next post in my series, “Luxuries and Necessities“
18 Comments
July 17, 2008 at 8:15 am
Hi Anna
I’m in two minds about a budget, and keeping strict records. I do it myself, and I can’t imagine keeping track another way.
But I’ve mentored a few people for whom it just doesn’t work.
After spending a few hours of frustration with a girl I was mentoring, trying to explain and set up a budget with her, she put it to me like this: “When I see a page full of numbers, they just start to swim around and confuse me!”
We then used a different strategy, and just put a few rules in place for her:
1. She won’t make any more debt.
2. Before buying anything else, she will pay X amount towards her debts (I helped her work out the X).
3. There were a lot of things she was spending money on that were not necessary (i.e. wants, not needs). We made a list of them, and she made a commitment to give them up!
4. She made a commitment to, the next time she could buy something, she would first think: Is this necessary? Or do I just want it? And only buy it if it was necessary.
Over a few months time, with this strategy, she still managed to get out debt, and start saving.
July 17, 2008 at 8:43 am
You are right Francois, budgeting doesn’t work for everyone!
It sounds like you came up with a great solution for this woman!
July 17, 2008 at 9:00 am
I found this great article for people who hate budgets.
http://www.pennyjobs.com//pp/public/Articles.aspx?aid=120
July 22, 2008 at 5:54 am
Anna, this is a super helpful post. Can’t wait to read the rest of the series. (Submitted to mixx: http://www.mixx.com/stories/1262229/step_1_to_digging_yourself_out_of_the_hole_assessing_your_financial_situation)
July 22, 2008 at 7:42 am
Thanks Greg! There will be another post for this series later this week.
July 28, 2008 at 5:38 am
[...] To Be Debt Free asks the tough question: How Deep is the Hole You’re In?. [...]
July 29, 2008 at 7:46 pm
[...] Be Debt Free presents How deep is the hole you’re in? “Instead of food, break the category down into groceries, restaurant meals, fast food, [...]
July 30, 2008 at 9:46 am
[...] as I have been up to this point. I will continue to write a post a week for my series, “A Family Guide to Living on Less“, as well as my weekly, “Super Freebie Friday” post, and [...]
August 2, 2008 at 6:02 am
[...] How Deep Is the Hole You’re In? [...]
August 6, 2008 at 8:45 pm
[...] How Deep is the Hole You’re In? [...]
August 6, 2008 at 8:47 pm
[...] is the third post in my series, A Family Guide to Living on Less. If you missed the first post, “How Deep is the Hole You’re In?”, go read it! Be sure to read, “Luxuries and Necessities” as well. Each post builds on [...]
August 11, 2008 at 12:27 pm
[...] How Deep is the Hole You’re In? [...]
August 14, 2008 at 10:34 pm
[...] to my RSS feed, or subscribe to On a Quest To Be Debt Free… by Email. Thanks for visiting!In my first post for the Family Guide to Living on Less, I talked about the importance of assessing your financial [...]
August 24, 2008 at 11:07 pm
it’s great that you were able to help this woman. She will need to find someone to help her do this on a regular basis, though (at least every 6 months), since it seems that she has such an emotional aversion to numbers.
Without being able to use simple math as a tool, she is at a serious disadvantage in being able to make financial plans and to make ongoing financial decisions in her everyday life.
I hope she can find a way to get over her confusion when she sees numbers. If not, I hope she has a trusted friend or a paid advisor (pay-for-service) that she sees on a regular basis about this stuff.
August 26, 2008 at 8:08 pm
[...] How Deep is the Hole You’re In? [...]
August 26, 2008 at 8:11 pm
[...] is the third post in my series, A Family Guide to Living on Less. If you missed the first post, “How Deep is the Hole You’re In?”, go read it! Be sure to read, “Luxuries and Necessities” as well. Each post builds on [...]
October 20, 2008 at 6:17 am
[...] Assess your financial situation~This means that every penny has to be accounted for and spending it must be a calculated undertaking. [...]
November 23, 2008 at 1:35 pm
Isn’t there a problem of self-delusion. I am always amazed when I read comments to the effect that “I save money eating out” or “expensive jeans are actually cheaper in the long run.” Many will delude themselves into believing that they are actually “saving” money when they are in reality spending too much.