Making and Sticking to a Budget

ONE of the surest moves to financial security is to create and stick to a budget. You need this all important personal balance sheet whether you are a student whose money runs out long before the month does or an executive with a comfortable income. A budget will quickly tell you whether you are spending too much and how you can save. Having a real budget not one that you pretend to keep in your head allows you to sleep at night without agonizing over how you are going to keep up with ordinary expenses and pay for the unexpected.

If you do not have a budget, start one now. In just three months' time you can win the battle of the budget. If you devote only a few hours during each of those months to considering and correcting your income and outgo, you can reduce overspending, free up money for savings and investments and build a cash reserve for that sudden urge or need to splurge.

During the first month, figure out precisely what you earn and what you spend. Add up your salary and any other money you receive, such as dividends, interest, allowances or child support. Then examine how you spend your money. You do not have to exhume all records dating back for years. It is more than enough to analyze your expenses and your income for, say, the last 12 months. This will enable you to calculate routine monthly expenses as well as sums that you must pay at irregular intervals, such as insurance premiums, school tuition and gifts. One purpose of your analysis is to help you plan for these irregular but necessary expenses so that you will never again have to invade your investments to pay for unexpected bills.

You may find that you just cannot account for a large share of your spending. To get a handle on that, try to keep a journal and jot down all expenses as they hit you, day by day, for a week.

Devote the second month of your budget program to figuring out how you can trim any excesses in your spending so that you can build savings and investments. Calculate what percentage of your total income goes to each expenditure, from clothing to commuting costs to mortgage payments or rent.

Some financial advisers recommend that you allocate no more than 65% of your take home pay for fixed monthly expenses, including food, utilities and rent or mortgage payments. Allow another 20% for such variable outlays as household repairs, recreation and clothing. Put aside 10% for necessary expenses that hit at different intervals, such as insurance premiums and property taxes, and the last 5% or more, if possible for savings.

Take a close look at your monthly installment debt. You are in good shape if 10% or less of your after tax income is spent on car payments, department store and credit card charges or bills for furniture and appliances that you bought on time. If the figure is 10% to 15%, you are creeping toward the danger zone. If those expenses stretch beyond 15% to 20% of your income, you are losing the battle of the budget.

To correct that, allocate a set amount of money each month for debt repayments. Pay as much as you possibly can afford. Figure out what indulgences and luxuries you can sacrifice temporarily. It may be sensible even to raid your savings to pay your debt. You will never get rich keeping cash in a passbook account paying only 51/2% while your credit card or other installment debts cost you more than twice that amount.

Particularly if you have a checking account that pays interest, you may be tempted to wait till the last minute to pay your ordinary bills. After all, the longer you delay, the more interest you earn. But be careful! If you cut it too close, you could end up paying finance charges on your installment debts. They probably would cost you far more than the interest you would earn on your checking account. Interest bearing checking accounts pay 51/2% annual interest or less, but credit card charges typically are 181/2% annually,

How can you make sure your bill payments will be on time? Keep this in mind: It is the day of receipt that counts, not the postmark. Federal law requires creditors to mail bills to you at least 14 days before you are supposed to pay them. But companies have to rely on the Postal Service to deliver them on time. And then you have to allow enough time for your payment to arrive by the due date. Postal delays do not entitle you to an extension.

In the third month of your budget making schedule, carefully re evaluate your income and outgo statement and make any changes so that you can live on your budget. Do not get carried away. Everybody needs some luxuries, so you and each person in your family should be allowed to keep at least one indulgence. If you are passionate about movies and want to see three or four films a week then adjust your spending in some other area. Successful budgeting depends on being neither too rigid nor too loose. If your budget is too lean, you will not stick to it. Your purpose is to make a budget that you can keep.

Once you have created a workable budget and conquered your debt problems, you should start saving a fixed amount each month. Deposit that sum in a money market fund, a bank money market deposit account, short term bank certificates of deposit, U.S. Treasury bills or other liquid savings. Put that cash away as regularly and as faithfully as you meet your mortgage payments or rent. Aim to build up savings that eventually will amount to three months of your after tax income.

One of the surest and simplest ways to save is to have a regular amount automatically deducted from each paycheck. If your employer offers a company savings or investment plan, grab it. Happily, the interest, dividends and capital gains on such accounts are tax sheltered: you pay no taxes on the growth of your money until you withdraw it, probably many years from now. And it is remarkable how fast your money will grow if it is tax sheltered. Also, you frequently can arrange for a fixed amount of each paycheck to be deposited in a bank savings account, a money market fund or a credit union. To find out how you can best accomplish that, just ask an official of your payroll department or the financial institution where you want your money deposited.

Automatic saving does not have to rely on the plans available through your employer. Comparable thrift routines are available at most banks and mutual funds. As a bank depositor you can have a fixed monthly amount automatically transferred from your checking account to a savings account or, better, a higher yielding money market account.

Eventually, the new saver emerges from the chrysalis as a full fledged investor. Mutual funds send out pollen in the form of automatic investing plans. By sending in a form and a voided copy of your check, you authorize the mutual fund company to draft a fixed amount from your bank account at specified intervals usually twice a month, once a month or once a quarter. On those investment days the company buys as many shares as your regular payment will cover and immediately credits them to your account. The same day, the fund submits a draft for the money to the nearest Federal Reserve bank or branch, an outpost of the Automated Clearing House. Via this interstate highway of electronic funds, the investor's bank instantly transmits the money to the mutual fund's account. Another way to save is to bank each pay raise until the next one comes along. Or sock away any minor windfalls, such as bonuses gifts, tax refunds, profits from your investments or free lance fees

Sticking to a budget requires work. Primarily, you will have to continue keeping sound records. You can do that by paying for all items over $25 with checks and letting them serve as your expense ledger. Put an asterisk on a corner of each check that you later might charge off as a tax deduction.

You also will have to keep working to hold your spending in line. Figure out what are your biggest expenditures, and how to restrain them. Probably most formidable are your income taxes. You may be able to cut them by setting up an IRA plus a Keogh plan if you have some self employment or moonlighting income and by switching from some taxable investments to tax free ones, such as municipal bonds. Make certain that you are using all legitimate deductions, notably those in the Introduction and under the heading of "Your Taxes: How to Cut Your Taxes."

Your second major expense is housing. It varies greatly, depending on where you live. If you buy a house in or around New York City, for example, you probably will pay twice as much as you would for a house in Phoenix. If you are spending as much as 40% of your take home pay on your home loan, check with a banker or some other housing lender to see if it makes sense to renegotiate your loan. Usually it pays to do so if you do not plan to sell your property soon and can get a mortgage with rates two to three percentage points below the one you now have. Anything less than that probably would not cover your closing costs and penalties for a new loan. But with a favorable new mortgage, you may be able to reduce your monthly expenses by more than $ 100.

A third budget breaker is your car loan. If the total size of your loan is more than 15% of your annual net income, it might be time to trade down to a less expensive model or scrap the second car.