Why have a budget.

“Whoever can be trusted with very little can also be trusted with much, and whoever is dishonest with very little will also be dishonest with much. So if you have not been trustworthy in handling worldly wealth, who will trust you with true riches? And if you have not been trustworthy with someone else’s property, who will give you property of your own?

Luke 16:10-12

Now that we have systems in place to track our income and spending, we know how to estimate our net worth, and we have our files set up, it is time to tackle the almighty budget. This is the true crucible of personal finance. Not so much the development of the budget itself, but the responsibility and discipline required to face the real numbers and adjust your lifestyle accordingly.  If this is the first time you have created a budget you may be in for a little shock. Most people don’t realize how much money gets spent each month on impulse items, such as fast food and convenient store or vending machine snacks. But this is why having a budget is so important. Unchecked spending can only go on so long before it catches up to you. And when it does, it’s usually sneaks onto your credit card statements at exceptionally high interest rates. A well designed budget combined with the personal discipline required to keep it is the most powerful tool you will ever employ to your finances.

The goal of a budget is simple – to determine how much income you have available over a set time period, and to divide that income up in a way that all of your financial needs are met. Notice I said needs, not wants. HDTV, high speed internet, and a 10,000 minute per month family cell phone plan are not needs. Because each family is different, each budget will be different but there are some important steps that you can follow as a guideline.

1.       Determine what your needs are – Be honest with yourself. Do you really need three cars?  Could you downgrade your internet connection or even cancel it if it really came down to it? Do you need both a home phone and a cell phone? On the other hand, don’t forget about things that help you earn an income. If your job requires you to wear a suit, then dry cleaning may be considered a need. Don’t forget about utilities.

2.       Determine the cost of your needs – Don’t forget to budget for long term items. If a car is one of your needs, budget in the fuel and maintenance costs. Things like clothing and shoes will wear out and need to be replaced as well. These are the things that tend to break a budget if not planned for. Finding your yearly clothing need cost may take a while before you get an accurate number but it still needs to be estimated and budgeted.

3.       Determine your income – I listed this third because often people need to know what their needs are in order to adjust their income. By determining the cost of your needs first you can figure out if you need to work more, less or if you may need to consider changing jobs.

4.       Set your spending – Set an amount for each need that you have. Once that is covered you can start giving some money to your wants. When the money runs out, don’t budget anything else. If you haven’t met your needs then you may need to consider some lifestyle changes.

5.       Get a second opinion – If you’re sitting at your computer at three in the morning trying to put together a family budget on your own…STOP. Most individuals don’t know the true expenses of their family. Ask your wife how much she really needs for school supplies or how much lunch costs for your kids at school. You may not consider life insurance a need but ask your family how they feel first.

It’s simple for the most part but it’s important that you’re honest about the numbers and stop when the money runs out. Part of the reason for having a budget is to keep you from spending more than you have. Your Mint.com account has an excellent tool for setting and tracking your budget but you will still need to follow the above steps to ensure its accuracy.

Be sure not to forget about saving and giving.

“There is never enough left over to save, it has to be budgeted.”

I don’t remember who said that but he’s/she’s right.  The same is true for giving. Don’t forget, this is not our money we are managing, it’s Gods, and he is very clear about our need to give. While the amount of each is up to you these should be listed under your needs, not your wants. (A good rule of thumb for starting a budget is to give 10%, save 10% and live on 80%. Then work on increasing the saving and giving.)

This is just a quick guide to setting up your initial budget. In future posts we will discuss popular strategies and budgeting systems that can help you increase your long term control over your budget. Don’t forget that as your life changes your budget will need to be reviewed and updated

Be sure you know the condition of your flocks, give careful attention to your herds; for riches do not endure forever, and a crown is not secure for all generations.

Proverbs 27:23-24

Our goal of this series is to honor God by taking the first step towards responsible management of the material possessions that God has entrusted to us. In previous posts we discussed how Paul trained himself to serve God with the same intensity that an Olympic athlete trains for the games and how he encourages us to train in the same way because the crown that we receive for our stewardship will last forever.

Today we are going to get right to work setting up our long term filing system. This will work in conjunction with the simple filing system that we set up last week and will give us an organized method of storing vital paperwork.

For supplies we’re going to need file folders. Regular manila folders work great but if you have a few extra dollars I would recommend picking up a few of the thicker, multi-classification file folders. They will last a lot longer and it’s just easier when you can group similar classes of documents into one folder. You don’t necessarily need a file cabinet for this but if you have one sitting around the house I would recommend using it. Many office desks have a drawer or two that are set up for filing as well. If you are using a cabinet of some kind then you’ll probably need to pick up some hanging files in addition to the manila folders. If you don’t have a file cabinet, don’t sweat it, you can pick up an expanding file (or accordion file as they are sometimes called) that will fit all of our needs for around $10. I would also recommend picking up a two-hole punch and some two-hole fasteners like these although they really aren’t required.

How to organize folders

There are several different thoughts on how to label your folders, the most popular probably being the one-account-per-folder approach which means that each bill (telephone bill, electric bill, checking account) is placed in its own folder (along with previous statements). In recent years the tendency for companies to offer multiple utilities has made this difficult. I get my home phone, internet, and cell phone all on one bill which makes it all but impossible to separate them into their own folders. That’s why I prefer the one-company-per-folder approach.

The first thing you need to do is make a list of every company that you have accounts with. Don’t overlook the companies that auto-draft out of your checking account each month. Also, be sure to include things like charities which you’ll want to keep track of for taxes but that may not send you a statement every month.

Once you have your list. Start making files. Label each folder and, with the two-hole punch, install a fastener. Now, if you have paid bills still being stored in the simple file system that we developed last week, go ahead and hole-punch them and put them in their appropriate file. This should be done at least once a month.

Now we have our tracking system and out filing system in place. Next post we will talk about the final step. Making a budget.

Creating a filing system

In a previous post we designed a simple filing system to help us keep track of which bills had been paid. Now we want to expand that system to more thoroughly manage other important paperwork such as tax documents, warranties, auto maintenance records, ect…

Be sure you know the condition of your flocks, give careful attention to your herds; for riches do not endure forever, and a crown is not secure for all generations.

Proverbs 27:23-24

The first thing to consider when creating a filing system is which documents you need to keep and for how long. While there is room for personal preference when designing your system you don’t want to go too far to either extreme. I admit I went a little overboard when I first started filing. I saved everything for years– utility bills, paycheck stubs, credit card statements, even the return envelops that came in the bills that I paid on-line (you know, just in case). While I’m an advocate of being safe rather than sorry, I have to say that my caution was not rewarded in this case. I ended up with two file cabinet drawers filled with years of worthless documents, a good portion of which were from a house in another state that was sold years ago. So while we are going to be prudent while we design our system, we are going to ensure that the documents we save are really important enough to hold on to.

So how long should we hold on to paperwork? That depends on what it is. Tax paperwork is usually the most important because the IRS can audit you for up to six years. So for tax forms or paperwork regarding assets that are taxable (such as a car, home, or stocks) we hold onto for at least 7 years. In the case of a taxable asset you want to make sure that you don’t start the counter on that seven years until it’s no longer in your possession. As long as you own it, keep all the paperwork for it. This includes any paperwork for maintenance or home improvements as they can help reduce your tax liability. The tax returns themselves I make sure to hold on to indefinitely. If any future errors are found in things like social security or a retirement account you can use them to track the problem back to when it started. You can save a lot of space by just scanning the returns into your computer as opposed to storing them in a closet. The documents themselves aren’t worth anything, just the information on them.

Non-tax related paperwork has a wide range of recommended hold times. As far as utility bills, credit card statements and paycheck stubs, you probably won’t ever need them more than a month after they have been paid or deposited but I usually hold onto mine until the end of the year and then carry over the last two months into the New Year just to play it safe. Sense you only get 12-24 each year and you already have a folder for them it doesn’t take up any extra space to play it safe. Bank statements are the same way except at the end of the year I throw all of them out except the year end summery. If you don’t want to hold on to these for that long it probably won’t hurt you. You can usually get another copy from your bank if you ask. As far as insurance paperwork, hold onto everything for as long as you have the policy or have claims open plus one full tax year. This doesn’t include those “explanation of benefits” papers you get after each time you go to the doctor. If there is a long term purpose for those please let me know because I put those straight in the trash.

More permanent things such as medical records (not insurance statements or explanation of benefits), pet records, insurance policies, and warranty information you’ll want to hold on to for as long as long as you have the object that it belongs too. In the case of medical records or pet records, that means as long as they’re alive.

In the next post we’re actually going to get our files set up but in the mean time you might want to get acquainted with your scanner. Scanning documents saves space in your house and doesn’t take up much space on your computer. In fact, I have about ten years worth of paperwork saved on a 2 GB flash drive that I keep in a fireproof safe as a backup. If you’re super computer savvy then you may not even need to keep paper files. Programs like Quicken will allow you to scan copies of your bills directly to the program so you can keep digital copies for years to come. There are also digital document organization programs out there for a price. If you know of any good free ones, please let me know. For those of us who prefer to be able to spread out our papers in front of us while we work, then I would recommend keeping the paper files and once a year scanning the old stuff to the computer. Just be sure to make a backup and keep it in a safe place.