There are long books dedicated to the practice of making household budgets. We suggest a mechanically simple process for checking your finances. To start, buy a small receipt book. A notebook will work...a day-planner is great. Also, buy one
packet of blue pens and one packet of red ones. Keep one red pen and one blue pen with your receipt book at all times. Second, for one month, collect receipts for every dollar you spend. From whatever tomorrow is to that same numbered day next month, ask for a receipt or make one for yourself every time you hand anyone cash, a check or a credit card. Third, tally your expenses. Put the receipts in the receipt book at least once a day. Using the red pen,
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list the expenses amount, date and party paid in the book at least every other day…in a clear, chronological order. Include everything from the 50 cents you gave your daughter for an ‘NSync sticker to the $2,500 check you wrote for this month’s mortgage payment. Include deductions taken from your paycheck...and note the fees added to things like
mortgage payments. Fourth, make a note in blue of every deposit you make into your bank account (if you have multiple accounts, focus this effort on whichever one you use primarily). Count every kind of deposit in this list salary, bonus, dividends, transfers from other accounts, loans from college friends, money from your aunt. Try to keep the deposits in chronological order with the expenses...but don’t sweat it if the order gets a little mixed up. The main point is to
include everything. Keep these records for the full month. Resign yourself to being an anal-retentive bean counter. At the
end of one month, it’s time for analysis. The main question: How do the blue total and red total compare? Don’t be surprised if the red total is larger. This is usually explained by credit cards, lines of credit and interest expenses. If you net out payments (usually by check) to consumer finance companies, you should end up with numbers that come close to matching.
A caveat: If credit card charges account for more than 20 percent of your total expenses, you’re probably using the things too much...and should be cutting back.
Once you’ve balanced the account, you can begin to characterize the ways you spend your money. Go back through your list of red expenses and give each expense one of the following numeric codes:
1 Shelter. This includes rent on your studio, mortgages on your homes. Insurance. Furniture. Repairs and maintenance. Utilities. No taxes—they go in their own category.
2 Transportation. This includes car payments, car insurance, gasoline, repairs and maintenance. Bus or train fares, the chauffeur’s salary. The ’66 Triumph you’re spending weekends restoring probably fits somewhere else.
3 Food. This includes groceries and kitchen-related expenses like water service, etc. This should not include the costs of eating out, though some people count prepared food they bring home. It should definitely not count discretionary items like gourmet coffee on the way to work each morning.
4 Health. This includes health insurance premiums, if you pay them yourself or they are deducted from your pay
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check (the paycheck stub should break out the details). It also includes copayments or deductibles that you pay out of pocket, money you spend on drugs prescription or not, and expenses for seeing chiropractors, therapists or anyone else who tends to your well-being.
5 Education. This includes the costs of your education or your children’s. Student loan payments, tuition, school supplies (including uniforms, afterschool activities or day care expenses).
6 Taxes. This includes everything you pay directly to the federal, state or local governments. Include income taxes withheld from your paycheck (and itemize that, breaking out federal, state and other, if you like). Also include property taxes that are impounded (that is, included) in any mortgage payments. Leave out sales tax for this exercise.
7 Retirement planning and savings. This includes contributions to retirement plans tax-advantaged or not; and money that you deposit each month into a savings account. Again, you may have some of these expenses deducted directly from your paycheck so look at that stub.
8 Recreation. This will be the first of several broad categories. It should include things like health or country club memberships, athletic equip ment, hobby supplies, collections, etc. Most people who use this system include travel and vacation expenses in this category. The ’66 Triumph and its attendant expenses probably goes here.
9 Entertainment. This includes eating in restaurants; drinks with friends; concerts, plays, sporting events or movies; videos you rent, books, magazines or newspapers you buy. It also includes gourmet coffee, lunches, online computer services or memberships, etc.
10 Clothes. Everything that you wear whether functional or outrageous goes here: work clothes, weekend clothes, funky thrift-shop coats, Armani tuxedoes, Nikes. Most jewelry. Dry cleaning and tailoring.
11 Communication. This includes your home phone bill and importantly any cell phone bills. Also, you probably should include things like home DSL lines and/or Internet service fees, answering services, if you use them, pagers, phone hardware, etc.
12 Religious and charitable donations. This may include cash contributions and pro-rated commitments (for example: one-twelfth of an annual gift that you’ve promised). The prorated commitment may be a little tough to calculate; keep it to actual pledges that you’ve made. Usually churches or
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charities will send you some kind of paperwork describing the commitment.
13 Interest and finance charges. This includes interest on consumer debt credit cards and the like. It should also include bank fees charged to your account and finance charges for things like cash advances and specialized transactions. It includes late fees for tardy payments. You don’t need to include interest on things like mortgages or margin loans...though some people do. You may feel that particular expenses deserve their own categories, or that these 13 categories don’t do justice to your complicated life. But the purpose of this exercise is to make basic conclusions about where your money goes. Most people spend roughly:
• 35 to 40 percent of their net income on shelter
• 10 to 15 percent on transportation
• 10 to 15 percent on food
• 10 to 15 percent on medicine and health
• 5 to 10 percent on savings
• 5 to 10 percent on recreation
• 5 to 10 percent on entertainment
• 5 to 10 percent on clothes
• 5 to 10 percent on education and daycare
• less than 5 percent on communication
• less than 5 percent on charitable donations
• less than 5 percent on finance charges Use this list as an indication of trouble areas. If one item is way out of range, it may be a problem. Pay particular attention to the items near the bottom of the list. The expense categories that surprise more people are communications, entertainment and interest/ finance charges. If any of these are more than
10 percent of your monthly spending, you probablyneed to cut back. This exercise isn’t intended for people with urgent
money problems. Make gradual, lasting adjustments rather than radical change.
Saturday, September 17, 2011
Keep Detailed Records
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