Choosing what you purchase and how much you spend is a key to gaining financial freedom. Now that you have collected your data, we can really take a good look at your budget. (If you have yet to collect your data, print out this form.) You have added up the numbers. You have stepped away for some fresh air. It’s time to look at what those numbers mean. First off, do your total expenditures come in less than your total net income?
Yes? Whew! That’s a great start. No? That’s okay. We’ll get there.
Regardless of your answer, the next item is the same: evaluate what you spend in each category. There is usually a way to cut back spending in at least a few areas. Even if your spending is less than your income, increasing the difference can mean more savings and a better safety net for you.
Food, clothing, and shelter are necessary things. Sometimes a mortgage can be refinanced to your advantage but not always. Shy of moving, it is hard to reduce your rent payment, as well. Our clothing needs are largely dictated by our work environment. If you wear a uniform, most clothing choices are made for you. When you have discretion in what you wear, choose quality over quantity. A high quality pair of shoes, for example, costs quite a bit more but is usually a better choice than buying multiple cheap pairs that won’t last past the season you bought them. Food is necessary - eat good food! Sometimes that costs more than eating poorly. However, if you eat out more than you eat at home, then buying groceries and preparing meals at home can make a big difference in your financese. I consider eating out entertainment. My husband considers it a work expense. It gives him a break from work to be able to leave the building and go somewhere else to eat with others or by himself. For a more thorough discussion of the financial and health benefits of making your own food, as well as the ease, you can read this article in Health Freedom. I also talk about medical costs in this Health Freedom article.
Vehicles are a place we can look to for budget savings. Sometimes an older model is cheaper. Sometimes it’s not! Older ones are easier to pay off because the initial cost is lower. Maintenance costs can be low and fuel is fairly constant. The problem lies in the aging car that begins to need more repairs. My husband’s car has been paid off for about 7 years, but last year he had enough repair expenses to equate to 12 car payments! If you are driving an older car, you get to evaluate what the costs really are. Also, if you live close enough and the weather cooperates, could you walk or bike? What about using public transportation or forming a carpool? Even biking to work just one day a week can save you 20% on your transportation costs that week.
Utilities are a good place to look for cost savings. Can you turn off a few more lights? Turn down the thermostat in winter and air condition up in summer? Do you have a leaky faucet or two that need repaired? Are you on the cheapest phone plan that serves your needs? Do you buy the latest phone with your plan or do you hang on to your phone longer than that? Do you need all the cable channels? Could you lower your internet speed at a cost savings? Are you willing to sacrifice some connectivity to help yourself financially? Some families institute a device-free summer for relationship building. This could build a financial reserve, too! Experiment with this and see what you can come up with over the course of a month or two. You might find some things that will be doable for you, at least for a period of time.
Child Care is important. If you have children and have to work, it’s important to find someone competent and caring. A lot of working moms find the expense negates their pay, however. Some moms and dads, especially single moms and single dads, are able to trade childcare with others by working different shifts. Some parents decide to become child care providers themselves since it is a service they need anyway. This benefits multiple families at once. There are ways to help lower childcare costs. Consider each carefully so that you know your child will be safe and happy and you will have the peace of mind you need to focus on your work.
Entertainment is an important item on our list. I think we need some form of entertainment to give us a break, help us experience culture, connect with others, especially reconnecting weekly with our spouse and/or family. If you are looking to reduce expenses, however, this may be a category to check out. Dinner out is nice, especially for a couple to have an adult conversation without interruption. However, dinner out costs much more than a home cooked meal. If you have a dinner date weekly, consider your favorite restaurant once a month and then rotate through a picnic in your favorite park, dinner at home and dessert out, and a walk in the evening. The same applies for movie buffs: could you switch from a weekly movie at the theater to going there once a month and then renting from the video store the other weekends? Every little bit helps.
Savings is an important thing to budget for. Having some money put away in your emergency fund can prevent the next car repair or doctor bill from being an emergency or, worse yet, a financial disaster. It is good to have a thousand dollars in an emergency fund, just to prevent financial problems and give you a cushion. Once you have your emergency $1000 saved, you can make adjustments to the amounts you put in savings. You can read more about savings in this article. It’s good to contribute some amount to savings, however small.
Okay. Are you ready to plan ahead? For things that fluctuate, like electricity or gas, there are a couple options. Some utility companies offer “equal pay options. When they have a year’s worth of data for your usage, they will average the payment out to be equal each month. You will pay more than normal in your low usage months, but less than normal in your high usage months. If companies don’t offer the equal pay service, you can calculate it out yourself. Add up your gas bill (or other fluctuating bill) for the last 12 months. Divide that by twelve and that is the amount you need to save so that you have some money in reserve when they high bills come. This makes it easier to pay for those expenses, especially with things like high utility bills in the winter right during the Holidays.
And speaking of the Holidays, you can budget to save money for Christmas and other gift giving. Most of us don’t get extra pay in the month of December, but we all seem to spend more to celebrate the holidays. Figure out what you are willing to spend now, then divide by the number of months between now and the expense. This will help you be able to afford gift-giving during the holidays. This also works with birthdays and weddings, as well as any other known expenses you will have. Want to take a vacation? Estimate the cost of everything, then evaluate how much money you can put toward the vacation each month, and save it just for the vacation. Divide the total cost estimate by the amount you can save toward the vacation each month and that will be the number of months you must save that amount to be able to afford the vacation.
You can now take some more time to evaluate what you would like to try here. What expenses can you reduce? What expenses were more than you initially thought they would be? Are there changes you can make in your lifestyle that will reduce your expenses or allow you to shift more income to another expense so that all obligations are met? Can you increase (or start) savings?
Take the Challenge… After reviewing and evaluating your income and expenses, set a plan of how much you will spend in each budget area for a month. Reevaluate each month and continue with any needed modifications. Be sure to visit your current budget frequently, until you get the hang of living by it. Even if you have been living by it for a while, it is still a good idea to check back every year. Also, if income changes or you have more or fewer expenses, redo your budget so that you can get the most out of it and adapt it to your new needs.