Here are simple and commonsense strategies to help you avoid banging your budget to pieces.
Many Americans spend much more than 100 percent of their income! Can't be done, you say? Sure it can — it's called indebtedness.
Of course, everyone needs a place to live, food and transportation. But fail to control even one of these budget areas and . . . bang . . . you could produce a financial disaster.
You need to plan your spending based on your net income, not gross income. Net income is the money available to spend after taxes and tithe. If you plan your spending based on gross income, you're scheduling a financial catastrophe.
Housing is typically one of the largest budget problem areas. Total housing payments (mortgage, taxes, insurance, utilities, phone, maintenance) for a family with a moderate gross income of $40,000 shouldn't exceed 38 percent of net income (not gross income). Don't finance a second mortgage for a down payment, and never finance closing costs.
Some families buy too much food. That moderate-gross-income family mentioned above shouldn't spend more than 12 percent of their net income for food. To avoid potential budget busting food problems, plan weekly menus, shop with written grocery lists and never shop if you're hungry or in a hurry. Avoid expensive prepared and frozen foods, and buy household cleaning and paper products at discount stores. Shop advertised specials, use coupons and try generic or store brand products (this isn't rocket science).
If our moderate-gross-income family spends more than 15 percent of their net income on auto expenses (monthly payment, repairs and maintenance, gas, oil, tags, taxes, insurance), they are courting financial problems.
If the car you're driving can be repaired for less than six monthly payments on a newer car, think about repairing, not buying. If you do buy, pay off the car you have before purchasing another, buy quality used cars rather than new ones and avoid car leases.
If you're restricting yourself to five percent debt for credit cards, bank loans including home equity loans and installment credit, you're unusual because, unfortunately, the typical American far exceeds this amount.
Avoid potential debt problems. Get rid of credit cards you cannot pay in full each month. Establish a payment schedule to pay all creditors regularly and get your debts current. When an existing debt is paid off, reallocate that money to savings or to pay off another debt.
The rest of the budget story
Each of the following areas shouldn't exceed 5 percent of your net income.
Establish some savings in your budget. Otherwise, credit can become a lifestyle and debt a way of life. Savings allows you to purchase items with cash rather than credit.
Anticipate medical and dental expenses and set aside funds regularly to cover the expenses. Don't sacrifice your health due to lack of planning, but at the same time don't use doctors and dentists excessively. Prevention is cheaper than treatment or correction. Ask doctors and dentists in advance regarding costs. Shop around for prescriptions and ask for generic drugs.
Some families in debt must sacrifice in the area of clothing, because of excesses in other areas. Yet, clothing can be provided without great expense with sensible planning and buying. When possible, purchase during off-season and select outfits that are home-washable fabrics that can be mixed in multiple combinations.
Select insurance based on God's plan for your life, not on what someone else says you need. Find a well-informed, trusted insurance agent to determine the best possible provision for the money. If your employer doesn't provide medical coverage, consider buying major medical insurance rather than hospitalization. It's less expensive and can cover up to 80 percent of adverse medical expenses due to illness or injury
Don't use your creditors' money to entertain yourself. Some recreation and fun is necessary, but resist the urge to indulge excessively and control recreation and entertainment expenses.
It's up to you
These suggested budget percentages aren't chiseled in stone, but they could help guard against problem areas that might become financial calamities for you. However, no budget operates by itself. It requires effort, and living on a budget is essential in order to maintain a debt-free lifestyle and keep your finances from going . . . bang!
Copyright 2006 Harvey Nowland. Used by permission. All rights reserved.