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Chapter 2: Improving Your Relationship with Money
Book I
Taking
Charge
of Your
Finances
can track how much you actually spend on essentials. Then for one month,
keep a detailed diary of all your extra purchases, even for cheap things like
newspapers or coffee from the vending machine at work. Little expenses
quickly add up to big money when they're made on a daily basis, and these
smaller, out-of-pocket purchases that are frequently made with cash usually
won't show up in your check register, so writing them all down helps make
you aware of where the cash is dribbling out of your life.
After you've discovered exactly where your money goes throughout the
month, you may need to reevaluate your written budget lists if you find your
actual spending differed from your anticipated spending.
Step 3: Calculate and adjust
Now that you've made two lists of budget items (essentials and extras), use
the two lists to see if your spending habits are keeping you in the red.
Add up the essentials list and the extras list separately. Subtract the essen-
tials total from your monthly income. If you have money left over, subtract the
extras total from that amount. If you still have money left over, great! Look
into a savings or investing plan -- talk to your bank or a certified financial
planner for help in setting one up. But if your extras list takes you into negative
numbers, start looking for places to cut back. For example, cancel your news-
paper delivery or eat out once a month instead of once a week. You can also
trim from the extras list in order to put more money toward debt repayment if
that's a high priority in your financial picture. Much of this book is dedicated
to helping you save money on various expenses, so don't give up hope if you
find you need to drastically cut your spending in order to stick to your budget
and live within your means. A lot more ideas are waiting for you in these pages.
The envelope system
The simplest budgeting plan is frequently
referred to as the envelope system. You can
revolutionize your financial situation by set-
ting aside cash in envelopes labeled with the
various expense categories that you pay for in
cash: bus fare, gas and oil for the car, grocer-
ies, lunch money, toiletries, office supplies, and
so on. (For things like utility bills that need to
be paid with checks, you don't use the enve-
lopes.) The envelope system can make all
the difference in the world because you can
visualize how taking a few dollars from the
grocery envelope to pay for a movie is actually
stealing money from a budget category. When
your money is just a lump of abstract figures in
your bank statement, taking a little bit here and
there for nonbudgeted items is easier to do. But
taking only cash to the grocery store makes you
shop more carefully, plan meals more frugally,
and put things back on the shelves if you go
over the budgeted amount.
