Now that tax preparation is behind you, did you find it was an easy road to travel? For most people it is not because receipts and other important pieces of paper are scattered around the home like autumn leaves in the yard come September. Let's look at the rudiments of a good file system. Direct from One Year to an Organized Financial Life I also have a few good words to say about the power of a budget. After all as you gather your receipts you will be able to see exactly how you spend your money. If you have goals for your life (buy a home, invest in the stock market, pay for your child's college education etc.), now is a great time to see if the reality of your finances supports those goals. Because taxes, budgets and file systems tend to give all of us brain exhaustion, I'm breaking this month's post into two parts. Let's begin by taking the dread out of ‘budgets.'
The Drama of the ‘B' word
You can get a rise out of folks if you threaten to use the ‘F' word in public. But start a conversation at your next dinner party about budgets and watch everyone break out into a sweat, get downright angry or leave the room in a huff. The ‘B' word has as much power to ignite a riot as that famous ‘F' word. Sadly most people view a budget as something of a financial straight jacket. Gone some imagine will be your ability to have fun and in will march draconian measures meant to set you on the straight and narrow of financial security. Nothing could be further from the truth. A budget is a tool that enables you to achieve your financial goals. It isn't good or bad, right or wrong. It's just a tool. And you know what they say: unlike lovers, friends or relatives, numbers don't lie! It makes for a great relationship. You can always trust what they tell you. And very often they tell you how much money you have for fun.
Because space is limited I'm going to give you the cliff notes version of setting up a budget. You can read more about it in the book I wrote with financial planner Russell Wild called One Year to an Organized Financial Life. You can also Google the term and find some handy templates on line ready for you to fill in with your figures. You need to know exactly how much you bring home each month. If you've got a 9 to 5 job with a set salary that's not hard to do. If you are a freelance person who gathers a stack of W2's at the end of the year, it's a bit more problematic. At the very least you'll need to come up with an average amount you make per month. You need to know what you can count on.
Just like Santa: Make a List and Check it Twice!
Please make a list of all of your monthly expenses. You'll no doubt breeze through the big items: mortgage or rent, health insurance, utilities, cell and land line phones etc. The big bugaboo is cash purchases. If you're in the habit of using an ATM whenever you need a little cash or paying for everything with your debit card, you're probably in trouble. Magazines at the checkout, fast meals on the fly, daily multiple designer coffee drinks and that occasional cab can all add up to a sizable chunk of your monthly expenses. And Heaven forbid you forget to note an ATM withdrawal or a debit purchase! It's best to give yourself a cash allowance at the start of a new week. You will know instantly whether you can indeed afford that magazine or latte. All you have to do is open your wallet.
If you have a shortfall, it's time to make more money with a better job, a second job or the sale of some personal items among other ideas. Is there a teenager, twenty something or other relative living with you? Be sure they contribute. Perhaps a bit of downsizing is in order? You know what they say: where there's a will, there's a way. If you have excess funds at the end of the month, set aside enough to support yourself for six months in the event of an emergency. Those come in unexpected shapes and sizes from unwanted medical diagnoses to natural disasters. After that fund is established, you can think about a home savings account, your child's college education or a dream vacation. And of course there's the whole world of investments. But before you can invest, you need a budget to let you know exactly how much is in that particular pot.
Part Two ~
We're going to take a look at how to set up a file system. Paper is one of the most overwhelming items in our lives today. We not only receive an avalanche each week in the mail, we get an excess every time we go to the doctor, contact our attorney or correspond with a credit card company or other supplier. You need to know what to keep and what to toss. But most of all you need to know how to find a piece of information when you need it.
A good file system comes to your rescue. It will make your tax prep easier and you will be able to stay on top of the items coming into and leaving your budget. That's right: a budget isn't meant to be a set in stone document. It should be reviewed every 6 months. You might pay off a credit card in that time and be reminded you suddenly have $100 extra income per month. Or maybe you pay off the doc for your child's braces and that frees up some cash. As you can see I'm into you paying off your debt rather than adding to it.
Get to work on your budget and then move on to your files. Next April will be a breeze!