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Tuesday, December 15, 2009

Getting Your Finances In Order

Re-post courtesy of Matthiasj from Kentucky Preppers Network

Running a strict budget could be THE most important part of living a frugal/preparedness-minded lifestyle. The goal is to save money, prep like hell, and cut out all the waste. I follow a mainly cash only budget plan modeled after the advice Dave Ramsey gives. The idea is that you use cash all you can, which allows you to physically see your money leave. It's a lot harder to spend cash than to swipe a card.

The first step to getting your budget set up is to figure out your monthly income. No matter how large or how small your income is a budget WILL benefit you. Next you need to map out all your expenses. This includes everything from your cell phone bill, to your water bill, to grabbing a cheeseburger at McDonald's. *Warning: Once your expenses are mapped out you might be surprised to see all the waste.

After every monthly expense is mapped out they need to be categorized. There are two expense categories; committed expenses and non-committed expenses. Committed expenses are your monthly bills that you couldn't "live without." This doesn't include monthly trips to the salon or a case of beer every Saturday. Although it would include you’re electricity bill, water bill, grocery bill, and insurance. Non-committed expenses would be eating out, vehicle maintenance, purchasing clothes or other non-essential items. *I say clothes are non-essential because most of us have a closet FULL and don't need anymore.

At this point your jaw should drop when you realize all the money you waste in any given month. From eating out to "junk" purchases. Even the little things add up from a coke at work to a snack on your break. Look at all the waste and pledge to remove it. Stop eating out, stop buying more junk that you already have, and cut down on your bills. Television is a huge waste and who watches that junk? There are endless amounts of commercial free TV on the web. Keep your internet, ditch the TV.

Your committed expenses need to be broken down to a weekly or bi-weekly figure (however you get paid). So each paycheck before anything is spent or saved the money for that week's committed expenses gets taken out. Then remove your savings. The amount you save from each paycheck is up to you, but even if it is only $1 a day, GET IN THE HABIT OF SAVING. I would suggest saving most of the money outside of your committed expenses (assuming those are the bare minimum). Before starting your savings account an Emergency Fund must be established.

Your emergency fund is your "rainy day" fund. It's there when things come up unexpected. This allows you to take care of it without dipping into money for bills or savings. You would use your emergency fund if your car broke down and needed repairs, home repairs, or medical care. The amount in your emergency fund is up to you. I suggest keeping it in cash and at least $2000 especially for families. This would cover most vehicle issues and other things. Take the money you are planning to save each week and put that towards your Emergency Fund. Once it’s where you want it, then put that same amount to the savings account to build it up. *I would suggest working towards a goal of having 3 months wages in your savings account.

So the concept is simple, as soon as you get paid take out your committed expenses (bills & food) and the majority of the rest save. It's okay to have a little fun money or Over Budget money. Over Budget money is used if you want to go out and eat, buy a video game or something outside of the normal budget. Make sure the over budget money is a small amount so that you don’t overdo it. This is your main source of spending money so spend it wisely and keep it at a minimum.

The committed expenses need to be separated into the payment type. I pay most of my bills online with my card, which is fine. Only use your checking account and debit card for this purpose. Keep just enough in the account (adding from each paycheck) to pay the bills when they're due. All bills that you can't pay with a card take the cash out as soon as you’re paid.

The bills to pay with cash need to be kept in an envelope. Each envelope labeled with the type of bill. When the cash is withdrawn after payday, put it in the envelope and don't touch it. This way, if you're monthly electric bill is $100, and you get paid weekly; put $25 cash each week into the envelope and at the end of the month pay it. This doesn't affect your bank account, savings account, or over budget money. And that's the beauty of it. You don't have to worry about paying bills because the money is there.

Click here to see a sample budget chart

*This is assuming you have little to no debt. If you have any debt, you're best plan of action is to cut everywhere you can and get out of it quick. Buckle down and spend every extra penny on paying down the debt. Pay down your biggest payment first. Then use that money to pay on the next biggest payment; and so on.