by Newt Rumble, CPA, CVA
In recent weeks news of investment market corrections, spurred by the collapse — somewhat predictably in this writer’s estimation — of the subprime lending market have caused increased anxiety among my clients and social contacts.
This is not an uncommon reaction to market corrections. In fact, serious corrections have caused increases in depression and even suicide among a public ever so unprepared for financial volatility.
In this article, excerpted from material provided by the American Institute of Certified Public Accountants, I am hoping to review and renew with readers a fundamental concept of financial preparedness and fiscal stewardship – making a budget and sticking to it.
This is not nuclear science. It takes only an awareness of a problem (cash flow or savings rate), a desire to change the behavior producing the problem, and the discipline to do it.
I recommend that you start your research for support materials by reading and following the advice of Michelle Singletary — author of The Color of Money, a syndicated financial news column that appears regularly in local newspapers. Besides the good core advice she provides, her humorous presentations make her an easy author to read. For a more droit, but less enjoyable perspective on budgeting, the advice of a CPA or qualified financial adviser are also important.
Lets review the simple steps:
Examine your financial goals
A budget is a road map to financial stability, But you can’t map a route unless you know your destination. Similarly, you must start you budget map by determining your financial goals.
Start by making a list of your short-term goals (e.g., new car, vacation) and your long-term goals (e.g., your child’s college education, retirement). Next, prioritize the importance of achieving each of the goals on your list. Estimate how much savings it would take to reach that goal, and then inflation adjust the savings rate to see how that extends the time period to the goal’s achievement.
Identify your current monthly income and expenses
To develop a budget that is appropriate for your lifestyle, you will need to identify your current monthly income and expenses. You can jot the information down with a pen and paper, or you can use one of the many software programs available that are designed specifically for this purpose. If nothing else any spreadsheet program can be used to record this information and provide necessary calculations.
Start by adding up all of your income. In addition to your regular salary and wages, be sure to include other types of income, such as dividends, interest, alimony and child support — where applicable, and other windfalls like regular family gifts, insurance settlements, etc.
Next, add up all of your expenses. To see where you have a choice in your spending, it helps to divide them into two categories: fixed expenses (e.g., housing, food, clothing, transportation) and discretionary expenses (e.g., entertainment, vacations, hobbies). I often recommend to clients that they break down categories with subcategories for adults and children; because age, seasonality and other factors change between the sub categories, providing for a more refined analysis and progress measurement indicator. You’ll also want to make sure that you have identified any out-of-pattern expenses, such as holiday gifts, car maintenance, home repair, and so on.
To make sure that you’re not forgetting anything, it may help to look through canceled checks, credit card bills, and other receipts from the past year, or at least the last three to six months. Finally, as you list your expenses, it is important to remember your financial goals. Whenever possible, treat your goals as expenses and contribute toward them regularly.
Evaluate and monitor your budget
Once you’ve added up all of your income and expenses, compare the two totals. To move forward financially, it is obvious that you should be spending less than you earn.
However, life is not always linear in the way it “comes at you.” For this reason, monthly monitoring and adjusting future actual expenditures to fit achievement priorities is important. This is where the discipline comes in.
Keep in mind that tracking every penny that you spend is not important. If the evaluation and monitor part is too cumbersome, you won’t keep up the monitoring, much less the record keeping. Above all, be flexible. Any budget that is too rigid is likely to fail. So be prepared for the unexpected (e.g., leaky roof, failed car transmission).
Recap of tips for achieving budget success
• Involve the entire family: Agree on a budget up front and meet regularly to check your progress.
• Stay disciplined: Try to make budgeting a part of your daily routine.
• Start your new budget at a time when it will be easy to follow and stick with the plan (e.g., the beginning of the year, as opposed to right before the holidays).
• Find a budgeting system that fits your needs (e.g., budgeting software).
• Distinguish between expenses that are “wants” (e.g., designer shoes) and expenses that are “needs” (e.g., groceries).
• Build rewards into your budget (e.g., eat out every other week).
• Avoid using credit cards to pay for everyday expenses: It may seem like you’re spending less, but your credit card debt will continue to increase.
• Invest regularly in a diversified portfolio of cash equivalents, market instruments, real estate.
• Get good advice, read materials on financial stability and planning, and don’t panic.
This article is provided by Newt Rumble, CPA, CVA, as part of a national effort of the AICPA and state CPA societies to improve the financial understanding of Americans.
Newt is a CPA and Vice President with Peterson & Associates, P.S., in Vancouver, Washington. For more information about the CPA profession’s efforts to expand financial literacy, visit www.360financialliteracy. org,. or call CPA and receive quality professional financial advice.
