Start 2012 Off Right--Take the Financial Budget Test

February 13, 2012

iStock_000017190002XSmall.jpgAt the Law Office of Linda C. Garrett, an online virtual consumer, bankruptcy and family practice, I receive numerous questions regarding financial matter to include issues relating to overwhelming credit card debt and payments, student loans, defaulted mortgage loans and many others.

Are budgets important and is there any correlation between budgeting finances and financial problems?

Purpose of this Blog Post

To educate consumers about the relationship between budgeting and financial problems. From my experience, they is a direct link between the two.

After 20+ years of working with individuals on financial matters, on both a personal and professional level, I have learned one thing--about 98% of consumers don't make or maintain a monthly household budget. Maintaining a financial budget is vital to anyone who wishes to not only live for today, but plan for tomorrow--including emergency planning.

Of the 98% who don't create budgets, about 80% don't have a savings plan (or emergency savings) and have little to nothing in their retirement plans.

As a general rule, before I agree to accept someone as a client, I first conduct a thorough financial assessment of their situation--a sort of "financial blood work" analysis. Why? Because both the client and I need to first understand how their hard-earned income is being spent. Usually, when it comes time for me to ask about their monthly expenses, their answers are, at best, guesses of how much they buy in groceries, spend on entertainment and eating out, and withdraw from the ATM.

From my experience, there is a direct correlation between setting a monthly-expense budget and saving money. Put another way, people who don't set budgets for themselves, statistically speaking, tend to also have money-management problems which equates to financial problems. For example, people who budget themselves have less credit-card debt than those who do not create a budget. Also, people who create budgets, tend to monitor their bank accounts more closely. And you ask, "What's the benefit of monitoring my bank account?" Glad you asked, some benefits include:

1. Knowing whether or not your bank is charging you monthly maintenance fees--which, over a year, add up. (And if you knew these fees were being taken out, you would also know that you could negotiate with your bank to eliminate these fees if you were a long-standing bank customer.)

2. Having no overdraft (or fewer overdrafts) charges because you will always know your account balance.

3. Quickly identifying unauthorized transactions in your account. You would be amazed to learn that most individuals have had unauthorized transactions made in their account, even as little as $1! (One dollar may not seem like much, but imagine the numbers if a thief is taking out $1 per month from not only your account but from thousands of other accounts per month.)

Ready for the test?

Step One--Take the Test

Answer "True" or "False" to the following questions--remember, no guessing:

1. At this moment, I know, within 25 dollars, the balance in my bank account(s)?

2. Within a range of $50, I know exactly how much I spent on groceries last month--from all sources (cash, credit cards, debit charges).

3. I know how much my bank charges me for account maintenance fees.

4. I know my monthly average for my electric bill.

5. I know how much I spent last month to fill my gas tank.

6. I know how much I spent in eating out last month.

7. I know how much I spent for entertainment?

8. I know how much I need per month in order to pay for my basic necessities, such as food, rent/mortgage, car gas, medical expenses, phone, utilities, and others.

9. I know how much I spent on discretionary items. (Discretionary spending is anything that is not a necessity, such as hobbies, entertaining, eating out, ATM cash withdrawals for pocket money, I-Phone apps, NetFlix, cable, electronic upgrades, electronics, designer clothes/shoes/jewelry/perfume, X-Box and games for X-Box, tennis lessons, gym dues, travel, vacations, etc.) Note: at least one-third of a person's take-home pays goes towards discretionary expenditures.

10. I have a savings account that I automatically deposit money into at least once a month.

11. I have a retirement account that I automatically transfer money into at least once a month.

12. I did not incur one overdraft charge with my bank in 2011.

13. If I used a credit-card to purchase something, I paid off the full balance within a month.

14. I know the interest rates on all my credit-cards.

15. I am, or will be, financially prepared to retire when I turn 65--with no debt.

16. I have money saved in the event of an emergency.

Step Two: Tally your score.

How many did you mark "True" and how many did you mark "False."

Step Three: Take action.

Start 2012 with taking control of your finances. If necessary, take baby steps. A little goes a long way. The key here is consistency!

• If you don't have a savings account, set up savings with an online bank such as ING Direct or Ally. Why? Because it creates an out-of-sight/out-of-mind mentality. Second, it usually takes a few business days for the online bank to transfer the funds back into your checking account--preventing impulsive transfers. To reduce temptation, you shouldn't be able to see your checking account and savings account at the same time; hence the reason for keeping your checking account with one bank and your savings account with another bank.

• On no less than a monthly basis, look at your all your bank statements and credit-card statements to identify the following:

1. How much you spent on food for all family members in hour household--of all types, such as the market, dining in, take out, Starbucks, school lunches, bottled water--for all meals such as breakfast, lunch, dinner and snacks. In other words, any and all types of food and beverages that you and your family put in your month for the entire month. (If December is an abnormal month, then use January's figures.)

2. Total up all ATM cash withdrawals.

3. Total how much you spent in discretionary expenditures. Remember, a discretionary expense is anything and everything that is not a necessity. Hint: If you have a home phone, a cell phone is NOT a necessity.

When totaling up the three categories above, then divide that number by your take-home pay figure(or combined take-home pay if married). Did the number exceed 33% of your take-home pay?

Conclusion

In sum, if you have experiencing financial difficulties, a good place to start is with figuring out where your money is going. And, if possible, create a budget and stick to it! From my professional experience, many financial problems can be avoided by creating a financial budget and sticking to it. (No doubt, there will be times when you need to deviate from your budget. The goal is to be able to give yourself an overall grade of B+ or better.)

If you are at a point where you need financial assistance because you are struggling to pay your basic necessities, to include payment of your mortgage payment and creditors, please feel free to contact me. I am here to help. Click Here to learn about my areas of practice.