Budget Doesn't Have to be a Dirty Word (March, 2009)

Most people cringe when they hear the word “budget.” They think of words like confining, restrictive and penny-pinching. Like diets, budgets are often started with the best of intentions but are quickly dismissed when the going gets tough. The truth is, a budget is essential to any sound financial plan and it is often avoided simply because we don’t like to think about how much we spend. Sometimes it is mind-boggling to see how much little luxuries like dining out and entertaining add up to over the course of a year. It is important to remember that the object of a budget is not to eliminate all unnecessary expenses, but rather to live within your means.

Maybe a better term for a budget is a spending plan. It is nearly impossible to sit down and plan out exactly what expenses you will have each month. But what you can do is identify fixed expenses that don’t vary much from month to month such as your mortgage, car payment, and insurance premiums. Subtract this number from your net take-home pay and the result is your discretionary income, the money that you are free to spend however you wish. This type of plan is flexible and allows you to adjust your monthly allocations to your changing wants each month. As long as you stay within your discretionary amount of money, you are living within your means. So if the opportunity arises to go on a weekend getaway, it is fine to go, but this means that you need to avoid discretionary spending somewhere else. You must prioritize. People get in trouble when they expect their paycheck to cover everything they want, and when it doesn’t they turn to their Amex or Visa, which is a bad idea.

In fact, overextension of credit is what got our economy in the mess it is in now. Ways to save are on everybody’s mind. We’ve found a few ideas around here that you may find beneficial as well:

1. Home phone - Over the past several years, the use of cell phones has skyrocketed. Even those of us who refused at first to own a cell phone have given in. While we can’t seem to live without cell phones, many of us don’t want to part with your home phone for one reason or another. Did you know that you could be saving hundreds of dollars each year by using Voice Over IP? T-Mobile now offers a service that adds a home phone line (you can keep the same number) to your cell phone bill. Sorry AT&T, your glory days are over. You avoid paying junk fees twice and pay as low as 10 dollars a month for you home line. There are other companies that offer this Voice Over IP service as well. Several of us in the office have been using this and have been very impressed. The quality is no different than a traditional phone line and included are all the calling features of a cell phone (caller ID, voice mail, free long distance, etc.). If you have broadband internet service at home, Voice Over IP is a very good option to consider.
2. Generics – How many of you are apprehensive about buying generic prescriptions because you are worried about the quality? The FDA requires generic drugs to have the same quality as brand-name drugs. Be sure to ask your physician or pharmacist if there is a generic brand available for any medicines prescribed to you. Also, pharmacies at some stores such as Kroger and Walmart have extensive lists of generics for as low as $4, so before you fill your prescription, check to see who has the best price. Publix has a list of 8 antibiotics that you can get for free with your prescription. This “generic over brand” concept applies to over-the-counter medicines as well. Before you buy Excedrin, read the label of the knock-off version and you will see that they have exactly the same active ingredients, for a much lower price.
3. Car Maintenance – Any oil change station will tell you that you should get an oil change every 3,000 miles. The truth is today’s car manufacturers usually recommend oil changes less frequently. Sometimes these can be as long as 5,000 to 7,500 miles. Check your owner’s manual for the recommendation for your car and you will probably be surprised. When it actually is time to get an oil change, almost all of the well-known service centers offer online coupons. When you get your oil changed, 9 times out of 10 they insist on changing your air filter. It is really easy to change your own air filter and save on the labor charge. A final suggestion is to keep your tires inflated at the right pressure to prolong their life, get better gas mileage, and get better control and traction. Also, rotate your tires as recommended in your owner’s manual for longer life. Some national tire center chains will even offer free rotations in an effort to get your business when you do need new tires.
4. Unnecessary fees: With a sound spending plan in place and proper organizational skills, there is no excuse for returned check or overdraft charges. However, mistakes happen and if you do get hit with an occasional fee, try calling the company and charming them with your niceness and remorse for this one-time slip up. Many companies that you have a good history with will waive the fee which is worth the few minutes you spend on the phone with them. One of the benefits of having a long relationship with a business is that they value you as a customer. Many companies such as cell phone, banks and credit card companies depend on have low customer turnover rates. They will often bend over backwards to keep a long term customer. Many of these businesses have a department solely designated to customer retention. If you don’t get the answer you want, hang up and call the 800 number again. You’ll likely find a representative who is willing to help. And speaking of unnecessary fees… if you signed up for a service to get the introductory rate but now that rate is scheduled to increase, call the company and mention that you are considering switching companies. Often, they’ll want to keep you and extend the introductory rate for a few more months.
5. Utilities – A programmable thermostat can adjust the temperature in your house automatically when you’re away or asleep. While you can find them for as low as $70, they will save you twice that much on your power bill each year. Florescent light bulbs can save you $60 in electricity per bulb and last ten times longer than conventional bulbs. Putting weather strips around the frames of your doors can save about $30 per year. With these minor adjustments, not only will you save money, but you will also do your part in going green.

Now that you have new ways to save and possibly a tax refund coming your way, what are you going to do with your excess discretionary income? Hold off on buying the big flat screen that is now 60% off. If you have any credit card debt, eliminating it should be the first thing you do with extra money. If your card charges 20% of your balance in interest, you might as well throw that money in the trash can.

Second, do you have an adequate emergency fund? A family should have between 3 and 6 months of expenses available in cash-like investments in case something unexpected occurs. This fund should be separate from the investments you have saved for retirement or future expenses. Third, how much are you saving? In theory, those working should be saving 10% of your income. Now I know that may seem like a lot and if it’s not possible to save that much, don’t get discouraged. Just save what you can. A good way to ensure that you are saving is to set up an automatic draft and treat it like any other bill.

If you are still looking for productive ways to use discretionary money, paying a little extra each month towards your mortgage or car note really goes a long way. Any extra money goes directly toward principal, reducing the amount of interest you pay and the time it takes to pay it off. For example, on a $100,000, 30 year 5% fixed mortgage, an extra $50 a month will save you over $18,500 in interest and cut your term by 5 years! Prioritize these extra principal payments to the highest interest rate debt first.

Lastly, don’t forget to reward yourself. You work hard and deserve a treat every now and then, just don’t get carried away!

I hope you will find the ideas in this article useful. While budgeting is not anyone’s favorite topic, having financial security and knowing that you are living within your means should go a long way in bringing you peace of mind, even in turbulent times.