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.
By: James Sheridan
Senior Vice President and
Lending Officer
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.
Senior Vice President and
Lending Officer