Commonsense Consumer Column
Volume 2, Issue 13, December 1998
Consumer’s Guide to a “FAT-FREE” Budget

As another year comes to a close, many people take a step back to evaluate their lives, and make a “new year’s resolution.”  The most common resolution for the new year is a diet — many people develop a food plan of healthier eating habits that will help them shed pounds.

The new year is also a good time to take stock of your personal finances and to see if you need to make adjustments for a “healthier” balance sheet.  In most cases, people have a lot more “fat” in their expense accounts than they realize.  One step towards achieving better financial health is to set up a budget.

It may be helpful to think of budgeting as a “diet” for better financial health.  Just as you count calories and avoid certain foods to lose weight, you have to “count your pennies” and avoid impulse buying to get rid of bad spending habits.  Keeping track of your income and expenses can be the key to healthy budget.  Using a budget worksheet like the one below can be a great help in tracking your finances.

When you’re dieting, you soon learn to cut back when you’ve overindulged.  In much the same way, on a budget, if you overspend in one area, you should try to compensate in another.  Like shopping for “Lite” and “Fat-Free” foods, look for spending deals like “Sale” and “Clearance.”

Keeping track of your progress is an essential part of both dieting and budgeting.  “Weigh in” on a regular schedule -- weekly or monthly – by writing down the actual amounts you have spent.  Then, if necessary, adjust your budget figures to be more realistic.

Bad habits are hard to break.  Dieting and budgeting both require self-control and discipline to reach your goals – with luck, they’ll become second nature.

Commonsense Consumer Column can be excerpted or quoted with acknowledgment given to its publication by Consumer Alert, a non-profit national consumer group headquartered in Washington, D.C. Frances B. Smith is Executive Director of Consumer Alert.

Consumers Take Charge – Budget Worksheet

Most consumers would like to get control of their finances, but may think that budgeting is too cumbersome, or simply don’t know where to start.  Budgeting does take time in the beginning, but once you have a good handle on how you spend your money, budgeting becomes almost second nature.  Here are some hints in setting up and sticking to a budget:

• Using the Budget Worksheet, review your bills over the past six months and put them into the budget categories.
• Figure out the average monthly expenses in these categories.
• For expenses that are paid each month, record the monthly expense, then multiply by 12 to get the annual expenses. For expenses that are paid periodically or annually (such as insurance), divide by 12 to get the amount you must set aside each month to meet those payments.
• For variable expenses, check your last six months of check payments in those categories to estimate your usual monthly expenses for each. Then multiply by 12 to arrive at the annual figures.
• Once you have listed monthly and yearly expenses in all of the categories of you spending, figure out your total income per month and per year.
• Subtract your monthly and yearly expenses from your income. If you find that the remainder is a negative number, you need to go back to some of the spending areas under your control to see where you can cut back.
• Your work doesn’t stop here. As your bills come in, keep track of your actual expenses in each category and adjust the budgeted figures, if necessary.
• Budgeting requires self-control and discipline to reach your goals – it can become a habit that will take you to greater financial security.

What are some of the things you can do without in order to save money each month?  Write down these goals.

I want you to cut up all credit cards that you are not paying off the monthly balance on.  I want you to keep only one card, a Visa or MasterCard that has the highest credit limit.  Eliminate the rest. They are causing you undo stress when you cannot make the full payment to pay off each month.

If you are you confused in the area of investments.  If so go to Ihatefinancialplanning.com and see if that can help.

What are some of the roadblocks you have with money?  Write them down. Now lets look at them and see if we can find solutions to them.

Go to: http://cgi.money.cnn.com/tools/assetallocwizard/assetallocwizard.html to access your asset allocation.

• The first thing you will need to do is to answer when you will need your invested monies, 3-5, 5-10 or 10+ years are your three choices. Only those close to retirement should choose the short-term numbers.
   
• Then it asks about risk. Remember what we said about risk. Make sure you understand what is appropriate. But also know that if you could not stomach the smallest possibility of loss in the short run, you should be honest with how you answer the question.
   
• You then submit these parameters, where the calculator then determines your asset allocation. What comes out of this is a pie chart reflecting what your allocation of money should look like.
   
• You then have a drop down list for each category that lists mutual funds that fit that category. For example, an allocation might say you should invest 40% of your money in bonds, 30% in large cap stocks, 15% in small cap stocks and 15% in foreign stocks. What this means is that for every $100 you have to invest you would invest $40 in bond mutual funds, $30 in large cap stock mutual funds, $15 in small cap stock mutual funds and $15 in foreign stock mutual funds. The nice thing about this allocation is that each category lists a sample of various mutual funds of that specific type. The funds listed show important information such as their past performance, their minimum investment requirements and how to contact them. My suggestion, especially if you are just starting out, is to first determine how much you can afford to invest and whether an IRA account or a taxable personal or joint account is more appropriate.
   
• I would then have you set up an account with the best mutual fund you can find in each category and then invest the recommended amount in each. Preferably, having the funds automatically deducted from your checking account each month. It may be that you should set up several accounts, both taxable and tax deferred, where you invest money each month. If you have a lump sum of money a different tactic may be required for the lump sum depending on your needs. However, an allocation recommendation should be valid for systematically investing smaller sums and those larger lump sums.
   
• If you are doing this investing all on your own without the assistance of a broker you should find the funds that have lower fees along with good longer-term performance. You can set up an account at a discount brokerage like Charles Schwab and they will help with the mechanics of setting up your plan. You can also go directly to the mutual fund company and they too can set up the accounts and all the details. Most of the full service brokerages can be beneficial but at higher costs. It’s up to you how you want to approach this but the important thing is that you start now.

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