Tuesday, October 21, 2014

Establishing a Personalized Budget

We have all heard before that it is important to establish a budget, but what is a budget and why is it so important? A budget is simply a financial plan for you and your family to help identify your current and future financial needs, and adjusting those needs to fit your income level. A budget will change as your income changes. It is not set in stone, it is an evolving plan.  For purposes of our discussion, I will cover establishing a budget from the perspective of someone who is developing a budget for the first time.  

The first two critical steps to establishing a budget are: 1.) understanding the difference between a “need” and a “want,” and 2.) having the self-discipline to follow your budget consistently.  It does not matter how good your plan is if you do not stick to it.  

Here are some standard budget priorities in order of importance, and some considerations with each:
1.       Food: Take advantage of advertised specials and coupons, but do not buy items you don’t need just to save money. Buy non-perishable items in bulk if you can; typically, retailers give better discounts for buying in larger quantity. Make sure you read the cost per unit tag on the shelf when selecting groceries. If you are on a tight budget, try to avoid eating out.
2.       Housing (rent or mortgage payment): Be aware with a lease agreement that there is a possibility the monthly rent will increase when the first lease expires. Also, realize your monthly house payment will probably increase over time as your real estate taxes and insurance will probably increase.
3.       Fuel/travel: There are several applications available for your smartphone that tell you where to find the cheapest gas. There are also grocery stores that sell gasoline and give you a price break on their fuel by shopping at their store.
4.       Utilities: Electricity and natural gas are negotiable with your provider in Texas since the industry deregulated. Log on to www.powertochoose.com to see what options you may have. Understand, however, that typically the cheapest rates require a long-term contract with expensive penalties for breaking early. They will require you pay your bill via automatic draft. Cable TV and Internet are “wants,” unless you utilize the Internet for your job. If your budget is really tight, consider doing without these two items until your budget is stable.
5.       Transportation: Remember to include your monthly vehicle payment and the associated insurance in your calculations. Also be sure to include oil changes, tires, etc. in your cash reserve mentioned below. If you live where you are able to utilize public transportation to get to work or can arrange to carpool, these are both alternatives to lower your transportation budget.    
6.       Debt payments: Include personal loans, credit cards, and other lines of credit. Make sure you pay bills when due to keep your credit rating good. Also, try to pay extra on existing debts. As you pay one off, apply those funds to the remaining debts. Paying debt off early saves you interest. Once all your consumer debts are paid off, apply the former debt payment towards building your cash reserve fund. 

7.       Savings: For our discussion, we will consider two types of savings accounts- a cash reserve and retirement. It is important, no matter what your current income level or financial status, that you establish a pattern of savings. Even if it is $10 per pay period, it reinforces the habit to put money away to build a cash reserve. There are many opinions on how much you need to save, but a good rule to follow is to build up a cash reserve equal to six months of household expenses, then start contributing to a retirement savings plan through your employer, such as a 401K plan, if available.
By: James Sheridan
Senior Vice President and
Lending Officer