This is the second part of a series on budgeting. The first, Frugal Facts: Get Your Expenses in Hand (Part I), walks you through the process of categorizing expenses. Now you’ll rework that budget, cut out unnecessary spending and save money for things you really want.
After you’ve made an expenses spreadsheet, it’s time to look at income. Be realistic. When in doubt, err on the low side. If you list gross income, compensate by adding an expense category marked “Taxes.” Even if you get bonuses and gifts throughout the year, you can’t count on them, so don’t list them. Think of them as financing a special category or something you are saving towards (car, furniture, vacation).
Your Income should equal your Expenses, but it rarely does. To see that discrepancy in print should emphasize why you are always scurrying around to make ends meet.
Now the hard part begins. You must increase income or decrease expenses. Human nature dictates that for most people, if income increases, expenses will rise to match it. So, it’s more productive to trim expenses.
To decide how to cut expenses, I’ll refer back to categories used in the last column on budgeting and in budget templates listed under resources.
Animals (pet food, vet): Do you pay to have Fluffy groomed or have her nails cut? Are these things you can do? We buy many goods and services out of habit. Here’s one where a small change in habit can save you $30 bucks at a shot for about an hour’s work.
Auto (insurance, gas maintenance, auto payment): Most people don’t shop for gas on the theory that driving out of your way for three cents a gallon is silly. And it is. If the gas station that has that three-cent savings is across the street from the one you are using, however, that changes thing. If you buy 25 gallons of gas a week, you will save $390 a year with just a three-cent savings. As for insurance, it makes sense to review your policy once a year just to make sure it reflects your needs, so you will likely find ways to save there as well.
Cable (if your cable bill is a bundle of services such as telephone, Internet, Cable TV, list separately): Review your Cable bill quarterly. If you have add on programs, you’ll find that you can get rid of something here and there, depending on the season. Shows end. If you’ve signed up for Showtime because of “x” show, and the show has been cancelled or has gone into reruns for six months, it may not occur to you to cancel the station. That’s an extra $10 a month, depending on your location and service.
Computer (Internet and other services): If Internet is in your bundle, and you are beyond the contract date, it’s time to see if you can save. With Internet, you have lots of choices. Unless you play intricate games, you may not need super fast Internet service, and that’s where the money is spent. Look at the options based on your family’s needs.
Clothing (shoes, repairs, accessories, clothing, uniforms, dry cleaning): Dry cleaning shops have lots of deals, a set price for a set number of items or even savings based on the day/time you bring items in. If you only use the service here and there, look at some of the products that turn your dryer into a dry cleaning machine.
Credit Cards (list separately): You may have signed up for a card based on a rate that no longer exists. If you have money in a passbook savings account at 1 ½ percent interest, and your card is charging 22 percent, pay it off. Then make payments into your savings monthly as if you still had the card until you get your “loan to self” paid off.
Dental (don’t forget to include insurance taken directly from your check): If you don’t have dental insurance, let the dentist know. Many will give you the same price if you ask. People will not offer a discount automatically.
Dining Out/Entertainment (restaurant, fast food, morning coffee, movies, bowling): Use coupons at all turns. In addition to the ones you find online, look for entertainment sites you can sign up for such as Groupons: http://www.groupon.com/baltimore/. This is for Baltimore, but it gives you a place to look for your city.
Gas & Electric: Many states now have more than one option. Look for a competitor. A friend signed up for a competitor in Maryland, and he’s saving 10 cents per kilowatt. Many think these offers are a scam or that it will be very complicated to keep track of. In Maryland, you get one bill, so it’s not complicated. You may have to do a little research to find the companies who offer services. Then it’s a matter of paying the monthly bill, same as always.
Groceries (list pet food under animals and over the counter meds under medical): Look for my companion articles–Frugal Facts: Save Money on Groceries with Coupons and Frugal Facts: Save Money on Groceries by Being a Smart Shopper as they will list tips in detail. Generally, don’t buy things just because you have a coupon, but if there’s a coupon, and you are buying the item, by all means take advantage. Think seasonal when planning meals, and always plan meals before you hit the stores. Look at the bulk prices, not the sales prices.
Home (association dues, mortgage, insurance, lawn, maintenance, pool, repairs, replacements): If you know you will spend $1,000 on a refrigerator this year, break the amount down over the months. In essence you will be saving along the way. Review insurance and mortgage once a year. Even though mortgage is set and it doesn’t make sense to refinance, you may be able to drop the hazard insurance to save money monthly.
Insurance (life, jewelry) Definitely shop for life insurance based on your behavior to see if you should be carrying term versus whole life. You may not own the jewelry you’ve been paying extra for, or it may not be worth it to hold insurance anymore.
Medical (RX, doctor visits, over the counter meds): Look for the pharmacy that carries the cheapest generic medicines. The savings are immeasurable, especially if you have children or elderly in the family. Comparison shop for over-the-counter items before you need them, and get them on sale. The key is before you need them. You rarely save money when you have to have something immediately.
Personal Hygiene (hair, nails): Nails are a pleasure item, so if you find it difficult to find money for your gas and electric bill, you must examine your spending habits for luxury items.
Savings (passbook, emergency, 401k): Give ’til it hurts. People tend to spend whatever they list as their income, so make savings an expense. It may seem impossible at first, but you’ll find you treat it as a bill and learn to work it in the same as the other expenses.
School (tuition, activities): Most of these are set decisions based on the school, so your decision can only be whether or not you can still afford the school.
Taxes:Review every deduction, and plan your spending to make sure you can use the expense as a deduction.
Telephone (separate land line from cell phone): It’s baffling that people still have long distance charges in a world where long distance is bundled in for pennies. Look into Skype, http://about.skype.com/, as well. It’s a great tool to keep families close, in addition to being a money saver.
Travel: Think about making a separate category for this one. In the original article on budgeting,I said not to include income that’s variable (freelance income, gifts, bonuses). Make a side budget to tie to this kind of income, particularly side work and overtime. Set a goal for your travel, going as far as to pick out the destination, so you have a quantifiable “Expense” figure. Now you now how much overtime or extra work you’ll have to do to meet that goal.
Once you’ve reviewed, you’ll revamp the entire list of Expense number. Here’s the important part, every budget is a work in progress. You will rework this budget throughout the year, and that’s a good thing. Every time you look at those numbers it makes you aware of what you are spending. That’s the best way to keep yourself tied to the budget and focused on saving for things you want, not just things you need.
A line Dr. Phil uses may be trite, but it’s true: You can’t fix what you don’t acknowledge. He means it for relationships, but it’s especially true when it comes to evaluating your spending habits.