It seems financial pressures, in one form or another, are always present is life.
Regardless of circumstance, large corporations, small businesses, families living
on one or two incomes or the single individual - everyone faces some kind of financial
pressure. It is because of this building pressure - and it is building - that regularly
reviewing the building blocks of smart financial management is vital to ongoing
success in regards to financial matters.
There is no more basic element in smart financial management than a budget. Even
in today’s fast paced world with all its seemingly urgent distractions, both
successful companies and successful people are thoroughly familiar with their budgets
and review them periodically. Not only are the most successful budgets reviewed
but they are also updated and adjusted, as needed , to provide the most effective
guideline for financial management for whatever entity - company or family - is
making use of them.
In today’s world, it simply isn’t enough to just break even every week,
month or quarter. There has to be something more, whether is it a profit for a business
or savings for the family or individual.
Making and establishing
goals is vital to successful
budget design.
Prior to developing a budget, any group or individual must consider what is trying
to be accomplished. What’s its purpose? Its goals? For a business, this idea
is generally captured in a Mission Statement. (Go to our website, if you’d
like to view Credit Advisors Foundation’s mission statement, www.creditadvisors.org).
Although they may not realize it, many families have mission statements, too. These
mission statements can be identified by examining family priorities and behaviors,
or actually sitting down together and creating a family mission statement. Regardless
of how you put the thoughts together, making these determinations and establishing
goals is vital, as a budget will break down before it begins if it lacks a well
defined goal to attain. Of course, as so much rests on these goals, make sure they
are ones you truly want for the future.
Once you have a purpose and direction in mind, budgeting becomes much easier. In
reality, budgeting is simply deciding what is important to your survival and success
in the full range from high priority (shelter, food, and clothing) to lower priority
(cable TV, cell phones, and entertainment). Budgeting also involves figuring out
what you ultimately can do without in order to meet your goals (goals such as paying
for college tuition, retirement, or travel.) What too often wins in the budget battle
are the lower priority items, simply because they are more quickly attainable. It’s
much easier sometimes to budget $75 per month for cable and avoid your child’s
displeasure today, instead of putting that money in savings for a college education
10 to 15 years down the road. The down side, unfortunately, becomes obvious when
the college bill does come due and you are forced to borrow and pay interest on
money that you could have saved up over the years. Or, as is often the case, just
as they are starting out in life, your student is strapped into years, if not decades
of student loan debt. Worse yet, college never happens at all, due to financial
limitations.
A basic rule to remember in financial management is when you save money, people
pay you interest, when you owe money, you pay interest to others. Some debt may
be ok, but in general terms, the person paying the interest is losing the financial
battle.
When building your budget and you actually begin looking at the hard numbers, set
aside a goal of 5% to 10% of your disposable income to yourself as savings. This
can take the form of savings accounts, mutual funds, certificates of deposit, even
cookie jars if necessary. Saving is what creates options and ultimately, interest
paid to you. Of course, it’s not the saving plan that does this but the actual
saving behavior, so focus on the follow through.
At first glance, it may not
seem as if you have much
control over the variable
essentials, but you really do.
After setting aside funds for saving, you must incorporate the essential fixed costs;
home payment and car payment into your budget. These should be the largest share
of your budget when you are just starting out and purposefully decreasing, as a
percentage rate, as you grow closer to retirement age. Variable essentials, such
as transportation costs, utilities, groceries, etc. are worked into your budget
next. At first glance, it may not seem as if you have much control over the variable
essentials, but you really do. Touch base with your goals to find opportunities
to lower or control costs. A little creativity doesn’t hurt either.
Once you have settled on your ‘fixed’ and ‘variable’ expenses,
you can begin to deal with the give-and-take of non-essentials. This category covers
a wide range of items and is directly involved with the goals. Remember how easy
it is to become sidetracked by immediate entertainment or urgent items. For example,
protect yourself from catastrophic medical issues with insurance, but maybe use
a high-deductible policy to keep costs lower. Must you have a new car or are you
resilient enough to handle a used vehicle? Are you in need of down-time, or can
you save time-off from work for necessities?
All of these topics should come up in any discussion on budgeting your income; every
item can affect your future and your lifestyle. And while there are no right or
wrong answers, as each individual or family has a unique situation and unique goals,
everyone needs to ask, and answer, the questions. So, forget about the Joneses;
decide what fits best for you by asking the tough questions; and remember, the sooner
you start, the sooner you’ll find your goals within reach.