Now that you have taken the time to figure how you are spending your money it is time to make sure you are spending it where you want to. This is where it gets difficult… and why it is so important to remember your goals that we talked about in the first installment of this series.
Each person’s situation is different, but there are always surprises after you sit down and honestly track your variable expenses. For me, it was the daily mocha and the satellite TV bill. Another number that may shock you is what you pay annually for interest on debt service. In other words, what are you paying annually in interest on your credit cards? How about for that boat that is sitting in the yard, used just two or three times a year? How much do you spend for clothing or meals out? These are all easy first targets as you try to set a personal budget that will help you achieve your financial goals.
The first temptation is to set unrealistic expectations of how you will address changes to reduce your expenses. For example, if you spend $500 a year on that morning coffee, you are probably not going to eliminate that expense completely. Set a goal to only have coffee on Monday and Friday which will reduce the expense by $300. Now $300 is a substantial amount of money that can be applied to your financial goals like reducing debt service or building a savings account.
Many folks see the initial number and say that they are going to eliminate the expense entirely, that is just not realistic. The same goes with your cable bill. Unless you are on the verge of bankruptcy simply try to reduce these expenses. For example, you can drop the premium channels or the 250 channel package for the 100 channel package. It is all a matter of making reasonable changes to achieve your goals.
The biggest risk is that you make drastic changes that you cannot sustain and then you go out a make an unnecessary purchase because you just have to spend money…. Just remember to make decisions that will lead you to reaching your goals over a reasonable period of time. If you owe $25,000 and you want to get debt free and you make $40,000 a year, you will not achieve the goal in one year. It is just not possible. So, set a reasonable goal of reducing your debt by $5,000 per year so that you are debt free in 5 years. This is a goal that is achievable.
Now is time to pull out the pen and paper or whatever other tool that you have chosen to start developing a reasonable budget based on what you know about your income, your expenses, and your goals. The most important part is to write it down. Oh, by the way, you are not done tracking your expenses… now you need to track them to make sure you are moving closer to, instead of farther away from your goals.
The final segment of this series will address a budget check in and other resources in case you are having a hard time keeping on budget.
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