Last Updated: December 1, 2008
With economic times being what they are, more and more people will likely resolve to create and stick to a budget in the New Year. But that's sometimes easier said than done. Indeed, like many resolutions, including the one to lose weight and exercise more, the resolution to create a budget usually lasts about one month.
But financial planners say it doesn't have to be that way. Yes you can create and stick to a budget. Below are what FPA members say are their favorite tools and techniques to help you keep at least one of your resolutions — keeping track of your money.
FPA member Dianne H. Webster, CFP®, of Integrated Financial Strategies, suggests "shifting your thinking" by breaking spending into three large categories: static, control and dynamic. Static is money that has been spent (or that has been agreed to be spent) in the past. That includes a mortgage, car payment(s), insurance, taxes and the like. Control is money to be spent in the next seven days. That includes dining out, entertainment and groceries. And dynamic is money to be spent in the future, including holiday gifts, vacation, education and retirement.
"Depending on a person's situation, I suggest certain proportions of income be designated in these three categories," she said. "This helps to see how debt affects your total picture, as well as building the assumption that a certain share of income should always be budgeted for long-term savings." Webster noted that technique is based on the "First Step Cash Management" system, which was developed by FPA member Marty Kurtz, CFP®, of The Planning Center.
For his part, FPA member Herbert K. Daroff, CFP®, J.D., of Baystate Financial Planning, suggests that you put every purchase on one credit card so that you can see precisely what you spend money on. With all your expenses on one credit card you can then use a software program such as Quicken or a spreadsheet to put each expense into its budget category, including food, clothing, shelter, etc. Of note, do pay off that one credit card in full every month to avoid late fees and unnecessary interest expenses. Besides using just one credit card, Daroff also suggests that you avoid using the ATM at all.
FPA member Jeffrey N. Tomaneng, CFP®, CLU, ChFC, of U.S. Wealth Management, suggests that married couples schedule a time once per week to go over their finances and to identify what each person spent. "Between meetings, I'll tell them to keep track of every expenditure on a small notepad or to keep receipts for every purchase," he said. "During the weekly meeting, as a couple, they'll reconcile their budget with Quicken or Money, pay their bills together and review the last week of spending."
In the beginning, Tomaneng said it's important to meet frequently. "It's like tuning an out-of-tune piano," he said. "You have to tune it pretty often in the beginning, but as you continue to play the piano, it stays in tune for longer periods of time."
For those less interested in keeping track of every nickel and dime and more focused on the big picture, consider this strategy. "We tend to stay away from setting strict budgets, but approach the idea more in terms of available income" both prior to and in retirement, said FPA member Michael A. Branham, CFP®, of Cornerstone Wealth Advisors, Inc. "Obviously the difference may be semantic, but (people) tend to see less negative connotation when you talk to them in these terms."
For example, when getting ready for retirement, Branham said he will have many conversations with clients about the resources they may have available, including pensions, Social Security, part-time work and portfolio income. "We will lay everything out for them to show them what the gross resources are, and what they might expect year to year with taxes," he said. "When we get to the net number, if it doesn't meet their perceived needs, we will have a conversation on the types of expenses they would have to cut out and how they may make up a shortfall in income if one exists."
If people insist on withdrawing a higher amount than what Branham would deem safe, he then talks about the impact it would have on someone's long-term security and what other resources may need to be tapped at some point, such as a house or potential inheritances.
"For us, the discussion of budgeting is best done in the context of available resources," Branham said. "It seems to put some perspective into the conversation, and helps (people) visualize how things will look month to month, year to year."
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