This is a question that most of us who have had credit cards or loans in the past have asked ourselves. There is a certain sense of freedom knowing that you won’t have those monthly payments to deal with or the compounding interest to fight against anymore. Who hasn’t thought that life would be better without having to make that monthly car payment? And with all that extra money, just think at how fast you’ll be able to replenish your savings.

Unfortunately, this isn’t usually a good idea. Your savings is your first line of defense against disaster. It’s your heavy winter coat when you’re in a snowstorm, or your suit of armor on a battlefield. Sure you could drop it and try to use your increased speed to get out of the blizzard or take off the armor and try to out maneuver the enemy, and you may even succeed, but one accident and it’s all over.

“Divide your portion to seven or even to eight, for you do not know what misfortune may occur on the earth”   -Ecclesiastes 11:2

“The wise man saves for the future, but the foolish man spends whatever he gets” -Proverbs 21:20

Trying to gain a financial advantage at the expense of your safety net is a hasty approach to a situation where your patience will pay off. It’s better to keep your savings in place in case of an emergency and steadily and faithfully pay down your debt. If you really want to pay down your debt quickly (and safely), you would be better off diverting some of the money that you put into savings each month to paying down whatever debt is bothering you.

“Steady plodding brings prosperity, hasty speculation brings poverty”

-Proverbs 21:5

The rule of thumb is to keep between 3 and 6 months worth of income in savings in case you lose your job. If you’re at a point where your savings could support you if you lost your income, then by all means, pay down that debt. Just be sure that you don’t cripple your savings account in the process.

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

We all have a weakness. Most of us probably have several. That one small thing that we know we don’t need that keeps us from sticking to a perfect budget. For some, its impulse buying at the checkout counter, for others, it’s not being able to pass up a deal on eBay or Craigslist. For many, it’s simply the convenience of fast food. For my wife and I, it’s takeout and delivery.

                Shelly and I have been married for almost 6 years and we have a 10 month old daughter. I work full time at the office and am currently slowly remodeling my house in the evenings and weekends. She watches children from home and takes care of keeping the house clean. If you have ever watched other people’s children or know people who have, you understand that your house is very rarely neat and organized. At the end of the day we are both tired and just wanting to relax. By dinner time neither of us feels like cooking and, after the long day, making another mess (or adding to the mess) just doesn’t seem worth it.

                I first realized that ordering dinner was becoming a problem when I found out that the lady at the Chinese restaurant down the street knew our address by memory. Considering that’s one of about 3 different places that we order from on a regular basis, I figured we must be calling too much. It really took me by surprise because I thought my wife and I were doing better on eating out. We have almost completely cut fast food out of our diet (we weren’t big fans of it to begin with) and now that we have a baby, we only go to restaurants on special occasions. Still, it seems that convenience wins out all too often.

                This next month, I’ve cut our dining budget in half. After going thought our spending for the last few months, I realized that our current budget left too much room for convenience purchases. In fact, the one time that my wife and I went to an actual restaurant to celebrate her birthday; it put us over budget because of all the takeout we had ordered last month. Now we have to make a decision; either spend an evening together in a nice restaurant eating food that we like and enjoying each other’s company or grabbing a few cheap and easy (not to mention tasteless) meals on the couch while trying to clear our head of the events of the day.

                We all have something that tempts us to break our budget from time to time. Now that I know what mine is, I have something to work on over the next few months. Besides, I’m sure the extra cash will come in handy this summer, and I could afford to lose a few pounds before I hit the pool. What other kinds of weaknesses are out there? I’ve heard of garage sale impulse buys, morning coffee at the coffee cart, vending machines, and many others. What’s yours?

          The most common reason that people give for not saving money is, “I just don’t make enough”. From a perspective, this is almost always true. It’s been said that your lifestyle will rise to meet (or exceed) your income. If that’s the fact, then no one really ever makes enough money, and they never will. But those of us who are conscience about our finances understand that it is important to budget savings first and then live within our means. Otherwise, there is never enough left over. I’ve done some simple math to compare the virtues of cutting expenses vs. making more income, so if you’re one of those people who are just waiting until your next pay raise to start saving, you may want to pay attention.

          Let’s assume that Person X is currently making a steady salary. He finally has his life in order and his budget is perfectly set so that he has exactly what he needs to pay his bills. He is only waiting until his next pay raise so that he can start saving. Let’s also assume that person X also has the uncanny ability not to be tempted to increase his lifestyle when the raise comes. That super power alone is enough to show that person X better belongs in a comic book than in the real world, but still, let’s just assume. At the beginning of the year, Person X is given a salary raise of $10,000 per year. Utilizing his super powers, he puts %100 of his pay into savings. But there is one problem, taxes. Person X doesn’t get to keep everything that he makes. Assuming that he gives 20% of his income back to the government he only gets to take home around $8,000 more per year.

          Now, let’s assume that Person Y is in the same situation. The only difference is that instead of waiting for his next pay raise, he changes his lifestyle to allow him to start saving now. He sells his newer car and buys an older model for cash; he cancels his satellite TV and subscription to “Yacht Magazine”, he starts clipping coupons and buying only what he needs and at the end of the year, he is able to budget $10,000 per year to go directly into savings. Sense his budget was based on his take home pay and not his salary; he doesn’t have to figure taxes into the equation. He has effectively given himself a 20% return on his savings over person X, and the only difference is the taxes that he didn’t have to pay on the money he saved.  As much as I would like to start computing the interest that each person earns over the years, I think that it’s clear who is going to come out ahead.

           The numbers that I chose for this example were picked to make the math simple but the point is clear. A penny saved is worth more than a penny earned because you don’t get to keep the entire penny that you earned. In fact, depending on your tax bracket, a penny saved may be worth 1.1, 1.15 or even 1.4 (or more) pennies earned, and when those pennies turn into dollars, the difference is astounding.

This past week I got quick reminder about what my material weaknesses are. Whether we know it or not, we are all materialistic to an extent. It’s good to know where your weaknesses are thought so that you’ll be ready when you’re tempted.

This past week, my home computer monitor gave out. Well, it didn’t really “give out” as much as start popping, and hissing and smelling like burning plastic and then shut down. I’ve had it for just over two years which means there was no warranty and an equivalent monitor would run me around $350. Seeing that I run a website for a living and spend a good majority of my day staring at a screen, my first instinct was to go shopping for another monitor. But there was a problem. This past month my wife and I ran into some unexpected expenses ranging from unplanned oral surgeries to a home improvement project gone well beyond budget and we were starting to get behind on bills. It didn’t take much for me to instantly want to turn to my credit cards for a simple solution.  After all, I do make a living working on computers. Why should I have to downgrade on a monitor just because my last one unexpectedly went bad. If anything, it was time for an upgrade. After a day or so of shopping I had a few prospects in mind. But I had been wrestling with the prospect of using my credit card. I knew that the right way to get something new is to save up and buy it with cash but this seemed like an exception (this feeling is usually the first indication that you have a weakness). After all, we don’t have another monitor and all of my finance info is saved on that computer. We use it for movies, games, work ect. If we have to spend money to buy a new monitor, then we should have another great one. Right?

Are you seeing where the materialism is sneaking in? The truth is, yes I needed a new screen, but, like it or not, it didn’t have to be top of the line, or even middle of the road. Looking back on it, thinking that I was going to go into hundreds of dollars of debt to get a brighter, higher definition picture of the same internet that every computer goes to seems not only silly, but a little scary. My wife and I both drive older paid off cars, we have a 23” TV in our living room that I bought for $50 almost 10 years ago and every piece of furniture in our house was either a hand-me-down, or bought at a thrift store for $30 or less. In fact, even the monitor that just broke was a free upgrade that came with the computer that we bought over 2 years ago. We don’t often give in to advertising or the urge to “keep up with the joneses”, so realizing how quickly I was ready to abandon our budget and turn back to credit cards was a real eye opener for me.

Well, it ends up that there was an old 15” CRT monitor stashed in the back of a closet at the office. I lugged that home last Thursday and it’s sitting on my desk at home right now. My wife and I decided that we would wait and save up the money for a new monitor. I can’t say that I’m completely satisfied with the outcome, after all, I still really want a new Hi-Def screen. But at least I made the right decision. And some good did come of the situation. My previously unknown weakness managed to surface and I was able to identify it before it could do any damage. So now that I know, I’ll have time to pray and work on my new problem while we save up for a few other things that my wife and I need more than I need a new screen.