Anyone who has even attempted to learn anything about financial stability has been confronted with the most obvious and yet sometimes the most difficult part of financial health: the almighty budget. Living without one will eventually catch up to you. For example, it can be sobering to list off the names of supposedly wealthy people who have filed for bankruptcy, because ultimately they did not live according to their means: Nicolas Cage, Fantasia Barrino, Toni Braxton, the list goes on and on and on ... Living on a budget might have saved those individuals from financial disaster and it can save you too.
It pains me to tell you that I have also had to learn this lesson the hard way. You cannot make ends meet with a credit card forever. It will eventually catch up to you. Life has a way of throwing us curve balls we never expected. For me, these were been illness and job loss. Maybe for you it's an expensive divorce or adding an aging parent to your household. Either way, we can't predict what next year will hold, so living like there will be more money next year to cover the checks we are cashing today just isn't smart. (I wish Dave Ramsey and Suze Orman weren't right about this, but they definitely are.)
Here's a very basic how-to guide to getting your finances in order, setting a budget, and begin living by your means today:
1. Write down a list of your assets and your debts. In the financial world you'll hear the terms "unsecured" or "secured" debts often. Here's what they mean: unsecured debts are basically credit card debts because you have nothing you can sell or give back to the bank to pay them off (in theory -- but we all know what that iPad will go for on eBay, so don't rule out selling it to pay your debts just yet). A secured debt is something like a house, a car or a boat -- if you can't make the payments, the bank can repossess the item and (if you are lucky) cancel the debt. Don't forget any retirement funds you might have (though touching them should be a last resort) and any life insurance policies you might have (some policies can be "cashed out" if absolutely necessary).
2. Write down how much your debts are costing you every month. Really? Yes, really. And if you are really brave (and I encourage you to be) write down how much you are paying in interest and financial charges on these debts.
3. Now write down the exact month in the future that your debts (if you have them) will be paid off. This part hurts, I know. You'll still be paying for that Toyota Scion XB in 2016? Sorry about that. Still paying for that of John Galliano newspaper print purse in the year 2018 -- even more sorry. Now, if you -- like many other people -- have used your credit cards to pay doctor bills and buy groceries, I do feel your pain. But it is time to stop, if at all possible. (Don't fret, keep reading.)
4. Write down the income you made over the last twelve months (total) and divide by twelve to get an average monthly income. Write this down. (Add in your spouse's income or anyone else who contributes to the bills at your house.) And if you've never made a net profit and loss report, time to make one.
5. Write down every reasonable expense you can think of from utilities to groceries on a monthly basis. Write this all down. Insurance, taxes, gasoline, internet, everything necessary.
6. Stare at the paper for a really long time. Don't skip this part.
7. Stare some more. (No, for serious. You have to look that piece of paper in the eye, feel all the pain it has to dole out, and be ready to move on.)
8. Based on this very basic information, establish how well you've been managing things. This is key information, because here's the point in the budget where you realize whether or not you need to sell your car and get something cheaper. Can you afford to still get your hair dyed by a professional? Do you need to sell your house and rent something smaller? If you are coming up short every month, you may need some major changes. And if we're talking about selling houses or cars or cashing out on a life insurance policy, consult a financial planner first. It will be worth the investment to get a professional opinion before making those kinds of hefty financial decisions.
9. Make changes to your lifestyle and set a budget you can live by. This daunting task will not be so overwhelming if you have done steps one through seven already. Right now you should know what you need to live on (sans credit card!). Now tack on a buffer for savings, vacations, car repairs, medical emergencies. (Some financial experts say 20% of your income should be set aside, but that may be shooting high if you are struggling like most of the world.)
10. Set aside any income that goes above the monthly average you have established to live on. You have adjusted your expenses to suit your income. ("Live like your wage," as Dave Ramsey would say.) Now you must realize that your income can be widely different from month to month, as a freelancer. Set what your monthly income must be, and then plan to set aside the money that may come in any given month that goes over that amount, in order to cover yourself in the months where the income doesn't meet the average. I know ... a dinner out to celebrate finishing the huge project for the big client is much more fun. But this is smarter.
The key to staying on top of things is to update the information on this master list every month. If you, like me, would rather not think about what you owe, this will be hard. Some banks have great online portfolio programs to help you manage this or there is always mint.com -- which has proven to be very helpful to a lot of people. The idea is to know what you're bringing in, what you owe, and where your money is going. Survival in any marketplace where your income can vary from month to month depends on careful monitoring of these details, so that you are never caught off guard. In fact, if you make monitoring your budget and variable income a weekly practice, you'll know how short you're coming up before it's crunch time and may be able to make changes to your expenses before the end of the month (e.g., cancel the weekend at the beach, cancel dinner out, to help makeup for the shortfall).
Congratulations. If you have done all of these things then you, like me, may be on your way to financial freedom and more viable long-term success for yourself or your business! Tell us in the comments below how you have learned to live in financial health in this somewhat unpredictable market.