Calculating Your Personal Profits and Losses

Page 5

Designing Your Budget
Considering everything you've now learned about your finances, spend some time thinking about priorities. What's the single most important goal to accomplish now? What's second, and what's third? Determine your top three financial priorities, and use them to inform your new budget.

You can build on one of the tools you already created, use a function built in to your money-management software, or start from scratch using a chart like the one in the figure below. However you choose to build your budget, be sure it includes these components:

• A place to record both anticipated and actual net income.
• A place to record both the anticipated amount and the actual amount of every expenditure.
• Budgeted amounts that are based on the most accurate information available to you.
• Plenty of reality: Do budget for an occasional movie or dinner out; don't think you'll be able to deny yourself all of life's pleasures for an extended period of time. At the same time, budget for unexpected expenses, too; don't count on making it through the next year without at least one minor disaster.

Now comes the creative portion of our budgeting exercise: plugging in the numbers. Organizationally, this is no different from arranging boxes on a shelf. You have a finite amount of space (money) and some items (expenses) that need to go into it. If everything won't fit, you must either increase your space (income) or decrease your stuff (expenses).

Suppose you discover that it's not all going to fit, and you have no way of increasing your space. There's only one answer: Some stuff will have to go. But how do you decide what to eliminate?

Start with the three priorities you identified a few paragraphs back. Maybe one of them was saving for a much-needed new roof, or contributing to your retirement fund, or getting out from under credit card debt by paying more than the minimum each month. What expenses are related to those priorities? Plug those in first.

View this Budget Template to see how you balance out.

Of the remaining items, pull out the ones that you must pay to avoid the direst of consequences. Add these into your budget. Where do you stand now? Is there still some room? Continue adding items, most important first.

Getting pretty full? Okay, maybe you can do some rearranging. Of the items you already put in, can you make any of them smaller? Could you shave a couple dollars off the phone bill, or even drop your home line and use just your cell phone? Look for some creative solutions to fit as much as you realistically can into your budget.

After you've wedged in all that's going to fit, commit to that budget. Start living it. You've spent hours and hours to get this far, so don't undo all of your progress by straying from the wisdom you've gained and then applied in developing your budget.

Trimming Expenses Gets Easier
As you're ranking your expenses in order of importance, you might find that it's now easier to eliminate some items you used to consider more important. This is a common phenomenon in organizing that occurs when you bring all items of one category or group together.

For example, suppose your clothes aren't at all organized. You have garments all over your house, and you're not sure what you have or need. You walk around picking up items of clothing, one at a time, and with each one you decide you should keep it. Enter the organizer: I gather up all of your clothes, sort them into categories, and bring you one category at a time to weed out. You had no idea that you owned six black sweaters, but now that you see them all together, it's easy to choose the two best and toss the other four.

The lesson: You can't make an informed decision regarding what to keep and what to eliminate until you can see everything you have all at once in each category. It's true with clothes, dishes, CDs, and knick-knacks; it's true with all forms of paper, from magazines to tax records; and it's definitely true with expenditures!

And that's as far as my organizing abilities can take you on this road. If you're ready for more advanced advice or assistance, it's time to talk to a financial expert. You can find plenty of free or low-cost information on the Internet (always remembering to take everything with a grain of salt); the Motley Fool site (www.fool.com) is especially comprehensive and comprehensible. Suze Orman's many books and tapes are very popular for guidance on budgeting and wealth-building and, of course, there's my favorite, The Millionaire Next Door. For one-on-one assistance, search the phone book or Internet for experts in the field of financial management, budgeting, or debt counseling. Continue to educate yourself with books, Web sites, conversations with friends, and consultations with experts. This is one venue where knowledge is most definitely power.