By Wayne J. Vaughan
After you have determined where you are (Step 1), you need to figure out where you want to get to; you should establish a plan. You need to determine what you need to focus on for the coming year. There are several questions you need to ask yourself. Do you have debts that need to be paid off? Are you saving enough to achieve your retirement goals? Have you saved up enough in an emergency fund? Are there funds that need to be set aside for children or other family members? What are the targets you need to reach regarding these items?
To establish your plan, you must set some priorities. Before you consider what you can spend your funds on, you should take a look at how much money your household brings home (the net pay, not your gross pay). Look at all the sources of your family’s income. For most, this is primarily take-home pay from employment. If you are blessed to have other income sources such as rental income, business income, investment income, etc., include that income in your calculation of your total expected annual income. Once you have determined the total income that is expected to be available to your family, then you can begin to allocate this income to the various types of expenses you will face. As I shared last week, I like to categorize expenses in several ways.
Must haves are items that you cannot avoid having in your budget. These expenses are vital to your family’s health, safety and shelter. Some examples are groceries (you must eat and choose your food wisely), rent or mortgage payment (unless you are living with a parent, you will need to allocate funds for this), utility bills (gas, electric, oil, etc., if you don’t do this then you will soon be cold and in the dark), clothing (include the cost of purchasing new clothes as well as cleaning clothes), health aids (i.e., toothpaste, toothbrush, deodorant, cologne, vitamins, soap, mouthwash, and for women feminine hygiene products are some examples). Also, there are 2 items that I consider “must haves” to include in your budget if you are a homeowner: that’s real estate taxes and water bills. If you don’t budget for these, you can eventually lose what is usually your greatest physical asset.
Should haves are items that although are not required, they would cause you considerable problems if you do not budget for them. Some examples are health insurance (if you do not have it, a serious illness could devastate the finances of you and your family), medications (if you have some health issues, you need to know how much you need to spend to maintain or improve your health), and household purchases and repairs (things do have to be replaced periodically). Additionally, there are 2 types of insurance that would be “should haves” depending on your situation. The first is life insurance; you would need to budget for the annual premiums if there is someone that depends upon your income for their support. The second is car insurance (if you own a car you should have this; without it, an accident could not only destroy your asset [the car], but have other financial repercussions).
Better life haves are items that help you to have a more enjoyable life. Some examples are vacations (please budget for at least one a year), entertainment (include a reasonable figure based upon what you can afford; don’t go overboard but don’t eliminate either), mobile phones (you need to keep connected), savings (when people have this they can have funds to place in an emergency fund and can have reduced stress due to peace of mind), Internet access (most of us like to communicate online as well), car (even though many do not have one due to good public transportation options, it is nice to be able to drive where you want when you want).
Helping others’ lives haves are items you budget for to help others in need or to advance causes you believe in. Some examples are charitable contributions (churches, other nonprofit organizations, educational organizations), gifts (birthday, anniversary, just because, etc.), loans to others (family and friends may be in need, if you can help without putting yourself in financial jeopardy, do so).
Debt obligations are payments that you may have if you have purchased any items using credit. Common examples are car loans, student loans, personal loans, home equity loans and credit card payments. These items should be budgeted for or else you could have a future filled with stress, bad credit and obstacles on your journey to improved financial health.
There may be more items for you to consider since everyone’s financial situation is different. However, without budgeting for all the items discussed you could have unexpected surprises. Have a clear understanding of how your money is being spent. As l shared in Part 1, track your spending daily, not weekly or monthly or else you will not get a true picture of your spending. This concludes Part 2 of a 5-Part Series. I pray that this week’s article will help you to get a better handle on your finances and that you will continue toward financial success.