Budgeting Principles
There are a few old sayings that come to mind when reflecting on the basic principles one needs to be financially successful.
First and foremost is “Live within your means” or in other words “don’t spend more money than you can possibly earn.” It may sound simple but with today’s easy credit card access, people often fall prey to the temptation to borrow on the credit card. Almost 50% of Americans carry over a balance of $5,000 each month. The average credit card interest rate in the US is almost 25%. So, even if you pay every billon time to avoid late fees, you will still end up paying $1,250 per year in interest unnecessarily. Beespecially careful about not paying just the “minimum payment amount” that appears on your bill.Paying just the minimum amount ensures you will be wasting your hard-earned money on credit card interest.
However, living within your means is more than just paying off your credit card each month, which is sometimes easier said than done. When things are constantly more expensive each month and it seems like there are always more monthly expenses than anticipated, how can we limit our expenses to the income we earn?
The first thing people should do is to set a monthly budget that reflects their goals and priorities. Most of our expenses (rent, phone, electric, credit card) are typically due monthly. So, figure how much all these recurring monthly expenses add up to and how much is left over for the next round of essentials – like food, transportation to work / school, etc. If you have some expenses that are due quarterly or annually, make sure you divide by 3 (quarterly) or 12 (monthly) and include some savings to pay for these bills when they come due.
The remaining amount of income left over now becomes critical for evaluation – because this is where you set your financial priorities. Many times, people fall victim psychologically to buying luxury /optional items to make them feel better about their life. Clothing and restaurant expenses fall squarely within this category and often consume a large portion of monthly income. It can make us feel better to demonstrate to ourselves and others that we are so successful that we can pay for these luxuries. The reality, however, is that too much spending on luxury items will drive you deeper into a financial quagmire that can become impossible to escape. Things like alcohol, gambling and tobacco can also take a large chunk of income. If you have an addiction to one of these, get professional help from your local community services.
“Save some money for a rainy day.” Ok, the next thing on our “to do list” is to think ahead - expect the unexpected. Inevitably, there will be some expenses we did not plan. Financial experts advise that you should have at least 3 to 6 months of living expenses in your bank account safety net. You’ll want to make sure you save a little each month for “unexpected expenses”, but you’ll also want to make sure you are saving enough initially to build your 6-month safety net.
Once you have all that covered, you can start thinking about your longer-term financial goals like buying a home, retirement, or college education for your children. Tomorrow always gets here faster than you think. The best way to make sure you reach your goals is to save a portion of your monthly income to cover these future longer-term expenses. Employers typically offer a variety of savings and retirement plans – often with matching contributions from the employer, as well as tax saving or tax deferral advantages. Not taking advantage of these plans is like throwing your money away.
Finally, a great way to look at savings is the old saying “Do not save what is left after spending, but spend what is left after saving”.
Written by Francis Daly. Fran is a Life Science Business Technology Executive. He earned a Bachelor of Science degree in Business and Spanish from the State University of New York - Oneonta, and a Master’s of Business Administration in Finance from Fairleigh-Dickinson University. Fran is a Certified Public Accountant and has extensive experience working in the pharmaceutical and life sciences industry over the last 40 years, working for Schering-Plough Pharmaceuticals, Revlon, and Apps Associates.