3 Easy Steps to a Balanced Budget
News Flash: Your personal checkbook is not the federal government. I repeat: It is not the federal government, which means you can’t (I mean, you can, but I don’t recommend it), operate in the red. Sure, there are reasons to take on debt throughout the course of your life when you want a new car, register for school (perhaps it’s not so black and white anymore though), a new house, and the like. But to do so just for your style of living is not okay from a personal finance point of view or from a long-term financial health standpoint.
Before I present my three tips, let’s take a look at the power of debt:
According to Mint.com, the average price of a 2010 Volkswagen Passat was $25,439. Let’s say you borrow the full cost in the 36 month loan at 5.91%. The real cost of the car turns out to be, $27,823, with $2,384 in interest charges added to the cost of the car. That doesn’t even measure the lost power of that $2,384 in your bank or your Roth IRA.
Start with the Basics
You need a roof over your head, food, and some kind of transportation. When looking at what you can afford in terms of living, don’t ever (slight exceptions) go over a monthly rent equalling 33% of your income. In New York City for instance, many landlords are now requiring you make 40-times your monthly rent. That means in order to be taken seriously for a $1,000 a month place, you need a $40,000 job. They understand the risks of debt and you need to as well. Once you have a home secured, you have to look at the other needs. What kinds of food are you buying and how are you getting there? Is your car loan another 30%+ of your budget? If that’s the case, you’re likely spending 70% of your income on two items. The car must be a lower cost. If that means trading the car in for something more cost-feasible, so be it. It sounds cliche, but you have a lifetime for the brand new car. Right now, you need to be able to function.
Cut Something Out
I love Starbucks. But I also love seeing a black number on my Mint account every month. The black number means that I brought in more money than I spent, which will help make sure your budget always stays balanced and is prepared for that rainy day when you lose your job. Perhaps it’s renting a movie instead of going out and spending $15 on the brand new movie, or making a cup of coffee at home for a fraction of the cost of a Dunkin Donuts or Starbucks brew. Or maybe it’s skipping the latest sale. If you get a latte one day a week for a year, you will have spent $260! Twice a week equals $520! The same goes with eating out. I’ve seen co-workers each out lunch every day of the week and never bring food from home. Here in New York City let’s estimate that a lunch is $7. That means if they order out three days a week for a year, that means they are spending $1,092 on lunch alone! And it’s probably not the healthiest either.
Document It
Perhaps not everyone is a personal finance geek like I am, but join a site like Mint or create a simple spreadsheet and watch where your money is going. You will be surprised how actually watching the dollars go up and down will make you think twice about walking into Starbucks or the latest sale at H&M.
If you need help with any of this, let me know and I’m happy to point you in the right direction. By just keeping these three easy steps in mind you will not only help your financial future, but will also reduce your stress because you will know that no matter what happens in the world, you will be okay.
Richard Dedor is a writer, speaker, and personal coach dedicated to helping people achieve their dreams. He ran for political office at age 18 and has written one book, Anything is Possible (http://anythingispossiblethebook.com). You can find him at his blog Believe in Possible (http://richarddedor.com) and on Twitter @RichardDedor (http://twitter.com/richarddedor).
Image credit:Shutterstock.com
Category: Money Basics
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