I’m sure by now all of you are using a written, zero-based budget for your household expenses, right? So this list is probably just another instance of me preaching to the choir. But just in case you haven’t quite gotten the hang of the zero-based budget yet, or in case you’ve run into a few problems implementing it, here are a few ideas about things that you might want to consider when adjusting your household budget from month-to-month, or in the case of changes to income and/or expenses. I think of the budget as something that is written down, but that is still malleable from month-to-month, because things that need to be spent tend to change from month-to-month, and sometimes you have extra money coming in for which your original budget doesn’t account. Taking these common mistakes into account will help you along your way to financial security.
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Never changing your budget.
As my introduction suggests, a budget should never be written in stone. Things change, different expenses and incomes come up, so your budget should adjust with the times. Here’s how the budget works in the Right-Click household: each month, I take the Excel spreadsheet from last month and do a Copy As for the next month. I then remove one-time expenses and other special items from the previous months and add categories that might be included in the next month. For example, our jewelry insurance is renewed once a year, so in January, I had to allow for a payment to this in our budget. Then, in February, we didn’t have the jewelry insurance to account for, but we did have some birthdays that required gifts. Each of these became their own line item. Some months have a bunch of these kind of extras, others not. Generally, I add any extra to the savings pile, and adjust the more expendable categories (like pocket money, or date night money) in the event 
of a bunch of extra expenses). After I’ve worked out the monthly changes, I email it to Mr. Right-Click, and he looks it over just to make sure he knows where everything is going, and that we agree on how we’re allotting things.
The bulk of the work involved with creating a budget is done the first two or three months you use one. After that, it should be relatively easy to make these kinds of changes. The main thing is to always be actively engaged in the management of your money, even when you are talking about small sums. Everything counts.
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Always changing your budget, because it’s not written down.
By the same token, your budget needs to have some clear definition. There are items that you will always have to pay, every single month, regardless of what is going on with the rest of your finances. These should be written down and accounted for, on paper, or on a spreadsheet, or using whatever budgeting software that you prefer. This will have to be changed and updated based on the funds available and the expenses that are changing, but it cannot be done with any kind of accuracy if you are doing it in your head. Take the time to clearly define your budget and you will find reaching financial sanity is that much easier.
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Not creating an emergency fund.
Creating your emergency fund simply cannot be put off if you want the rest of your budget to work. If you have no emergency fund, you will end up using credit cards (or worse, mortgage/rent money) when something disastrous happens. Do yourself a favor and place this at the top of your list for savings.
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Not planning for infrequent or one-time expenses.
Sometimes expenses will come up that are not emergencies, but neither are they part of the usual budget, such as the jewelry insurance example I cited above. One way to plan for these expenses is to have an extra amount in your budget that is allotted for these kinds of miscellaneous expenses, or to create a “sinking fund” to account for them. This fund should be kept separate from all other savings, with the idea that it is to be used for one-time, infrequent, non-emergency expenses like insurance premiums, Costco memberships, or large gifts.
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Leaving too much room in your budget.
Above I advocated leaving a little bit of room in your budget as an alternative to creating a sinking fund for non-emergency, infrequent expenses. This is OK to do so long as you commit to putting any excess from this kind of extra room into your savings at the end of the month. If you’re not sure you can do this, then creating a sinking fund is probably your best bet.
I have written at length before about how you have to have an emergency fund, and how this is part of safeguarding your financial sanity, and how you have to have it if you want to be grownup. And yeah, I hate to harp on these things, but especially these days, you need to have that emergency fund in place. You might just need it to be a little bigger than usual, in fact.
Here’s the thing: emergencies will creep up on you. A lot of times they don’t appear as dire emergencies, though. It’s not always as dramatic as a job loss or an extended illness. Sometimes it’s a car repair or a higher dentist bill than you expected. These are the kinds of things that can really mess up your whole plan for financial health. This is why, when you’re first getting out of debt, your top priority needs to be creating an emergency fund that cushions you from unplanned expenses. So I’ve compiled the following tips to remind you to get your emergency fund off the ground help you reach your goal of establishing a well-funded emergency fund before disaster strikes.
- Consider your circumstances when setting a savings goal.
When you are trying to figure out how much to save for your emergency fund, there are several factors to take into account. Firstly, are you trying to get out of debt? If so, you will need to forgo some of your larger emergency fund plans for the time being, but be sure to give yourself a head start just in case something bad happens. You need to consider how many people depend upon your income, and what expenses will need to be paid in the event of a job loss, for example. Also, is your employment situation stable, or are you already feeling uneasy because of the economic climate? Be honest about your circumstances: all of these things will help you answer the question of how large to make your emergency fund.
- What are your baseline expenses?
If you are shooting for the standard ideal of three to six months of expenses set aside for an emergency fund, then you need to look at your budget and come up with a number for these expenses. If you lose your job, you will still need to make mortgage payments or rent, pay for food, and keep the lights on. However, you might not need to consider “entertainment” expenses or extra savings in your numbers for expenses, so the number will be less than your typical monthly income. Only a careful assessment of your zero-based budget will tell you what this number is.
- What are your short-term cash needs (what money will you need to have on hand during the next five to seven years?
If you have parents or friends who are trying to retire in the near future, then you are probably familiar with the concept of keeping cash on-hand if you will need it in the near future. This means that your emergency fund should never, ever be put in the stock market. Yes, even in times of plenty. Even when you are getting crazy returns. You need your emergency fund in an account that allows you to access it with a minimum of difficulty. This also goes for short-term cash that you will need during, for example, the first five or so years of retirement. Since you cannot count on market returns, you want to make sure that you can withdraw the cash you plan to use for living expenses in the event of a job loss or retirement without worrying about how an investment is performing. People who had to take money out of the market to retire in the past year are well aware of this fact–they may have been counting on a certain amount, only to see that amount shrink almost overnight. And when you’re trying to retire, you don’t have time to wait out the market. The same goes for people in an emergency.
- Get the best return for your emergency funds, but keep them liquid.
This is where shopping around for a bank is useful. As I said before, you want to keep your funds where they are relatively easy to access. The Right-Click emergency fund is kept partially in an ING Direct account and partially in an account with GMAC Bank, which allows us to access the money via ATM/Debit card or check whenever we need it. Returns are not great these days, but then if you put money in the market, you are likely to get negative returns, so look on the bright side!
Happy savings!
Retirement planning is something that people don’t usually like to talk about. The fact is, it is really easy to put off retirement planning when you are still trying to get your head above water from your time in school, or when you are still worried about buying your first home. Some people are very good at it, and learned quickly that the easiest way to do it is to start early and then pay less later. Unfortunately, some of us (cough) don’t seem to learn anything unless someone takes a 2 by 4 to the forehead. And as a result, it is a painful topic to consider.
Another thing I have to take out of my paycheck, you protest?! I am barely making ends meet as it is! This is where retirement planning starts to sound a lot like dieting: maybe next year I’ll start doing it. You start to find all kinds of small things that are standing in your way. Well, if the fact that the world is melting down around us hasn’t clued you in yet: now is the time to start planning for your own future. No matter how tight things are right now, you simply cannot afford to not start planning now. And to do this, you will need a plan. So roll up your sleeves and get cracking on the following easy steps to get your retirement savings underway.
- Find out about retirement plans offered through your job. Before you do anything else, try to find out if your place of employment offers a retirement plan. If you don’t already know the answer to this question, you should contact your boss or HR representative for more information. Many workplaces offer programs such as the 401(k), which are easy to participate in, and can be set up to make contributions directly from your paycheck. If your employer has this kind of plan, you should sign up for it immediately, even if you are not sure how you are going to afford to make contributions. You can set up your contribution plans for as little or as much as you want, and usually can make changes fairly easily.
- How much should I contribute? This is a tough question to address, because when you start talking in terms of percentages of income, people start getting anxious about how much their income is going to be lessened. If you are using a zero-based budget, you should be able to figure out where you can cut things in order to make contributions. How much you contribute will be affected by your current financial circumstances. Are you out of credit card debt? If so, then you should shoot for as much as 15% of your income going into retirement (this is what Dave Ramsey recommends). If you’re still paying off debt, you will obviously not contribute as much, and if you are younger than 30, you can afford to contribute less. But you should still shoot for at least 5% if it is at all workable. If you are following Dave Ramsey’s baby steps to the letter, he advocates suspending all retirement savings until you are out of debt. This is a drastic step, but if you are confident you’ll stick to Dave’s plan, it is OK to do it in the short term. Whatever you decide, though, do not let years go by without contributing to your retirement. If it’s taking you that long to get out of debt, you will need to explore different options.
- It will almost be like stealing money from the government! If you contribute 5% of your income to a 401(k) plan, your actual take-home income will only be going down about 3 1/2% Wha? you say? This is because contributions to a 401(k) are taken out of pre-tax income, so the bottom line is that you’re getting more of your paycheck and the government is getting less. For example, let’s say you make $30 an hour. In a week you make $1200. About 25% of that $1200 goes to taxes, so your weekly paycheck is more like $900. If you contribute 5% of your pre-tax income to a 401(k), then in a week you will have $60 going toward your retirement, and the number that the government taxes you on is only $1140. So, after your 25% taxes are taken out, your ending paycheck is going to be $855. Your take-home pay will only be going down $45, even though you saved $60. And hey! who doesn’t like free money?
- It seems like a big sacrifice, but really it’s not. The reduction in your paycheck seems like a big deal at first because it’s a change. When earnings fluctuate, people tend to spend less to keep up with the reduction, almost naturally. And if you’re doing a budget, you can see that in action. With a smaller number like the $45 in the example above, you can often address it by bringing your lunch to work or brewing your own coffee instead of going to Starbucks.
- Don’t forget about matching by employers. This is getting less common these days with the problems in the economy, but many employers will match your contributions up to a certain percentage. If your company does this, you can count that in your ideal of 15% of your income going to retirement. Be sure to check with your company for the details on these kinds of programs, if they exist.
- Start a Roth IRA if your company has no 401(k) (or similar) program. A Roth IRA is an independent retirement plan you can set up on your own through a financial company like Vanguard, Fidelity, or Schwab (or whatever company you prefer). Many companies allow you to set up Roth IRAs online. With a Roth IRA, you put after-tax money in, which means that you don’t get the fun of feeling like you’re stealing from the government, but the good news is that you don’t have to pay big taxes on the returns later on down the road (when your contributions have hopefully grown to a large amount). Roth IRAs have certain income limits, so you will have to check with your financial company to see if you qualify. If you do not qualify for a Roth, you will qualify for a traditional IRA, which works in much the same way but has different benefits and drawbacks.
- Invest your retirement funds according to your age and circumstances. The good news about the economy and the market these days is that stocks are on sale. So, while it is a good time to buy, you need to look for companies that stand the test of the market. The best way to do this is to buy into index funds that reflect the performance of the market as a whole. That way, if an individual company goes out of business, you aren’t left holding the bag. Of course, if you need to retire in less than 10 years, you should probably stick to things like bonds for your investments. You simply don’t have the time to wait out the market, and a financial planner can help you with these kinds of decisions. No matter what investment decisions you end up making, you should also shoot to diversify across a bunch of different kinds of funds and investments, so that your retirement eggs aren’t all in the same basket.
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