First Column - Budgeting

January is a time for reflecting on the previous year and setting goals to make the coming year even better. Many of us have probably reflected on the past year and realized that we have spent a little more and saved a little less than we should have. Many of us have a little more debt than we should have, and many of us aren’t quite sure how to improve our situation. The good news is that personal financial success has much to do with behavior (commitment and discipline) and little to do with knowledge (some say the ratio is 80/20).

This column is designed with this idea in mind. My goal is to provide basic personal financial principles and real life situations that will give you ideas and motivate you to stick to your plan. Although I don’t know all the answers, I won’t be biased because I don’t make money from selling any financial product. I do facilitate a class locally called Financial Peace University provided by Dave Ramsey (www.daveramsey.com/fpu) starting next month (email me if interested –signup deadline is Jan. 27), but my role is purely voluntary.

The usual format of this column will be question and answer. If you have a question you can email me, and I will do my best to answer it in this column. I will start with a question I have heard often: “I don’t think I make enough to cover my expenses because every month I seem to be going deeper into debt. What do I do?”

The foundation of doing well with money is the “B-word” (budgeting). Even if you have a great income, there is simply no way to be successful financially without knowing where your money is coming from and where it is going. Starting a budget is like giving yourself an immediate and tax-free raise. To get started, take a couple of months and write down every dollar you make and spend. You will figure out where there is waste and what you really need to live on. You have no choice but to spend less than you make – going deeper into debt is not an option.

Once you’ve figured out a reasonable budget, I recommend using the simple but effective cash envelope system. For expenses you can use cash for (i.e. groceries, clothes, even gas), take out enough cash for a month, two weeks, or a week. Put the cash into envelopes for different categories, and when the cash runs out, you’re done spending until it comes time to fund the envelope again.

It is effective for two reasons. First, studies show that people spend significantly less when using cash vs. credit cards and even debit cards. Second, you always have a visual reminder of how much money you have left without the safety net of a credit card. Budgeting takes work and discipline, and it will take several months before you’re comfortable with your budget, but the results will be well worth the effort!

I will discuss these more in future columns, but for what to do next I recommend that you review Dave Ramsey’s baby steps (www.daveramsey.com/new/baby-steps).