Your Money_ The Missing Manual Part 3

Health care: $100 .

These numbers are targets. Every month, do your best to stay within the goals you set, but be willing to make course corrections based on your actual habits. For instance, if your family struggles to keep your dining out expenses under $300, you might b.u.mp your target spending in that category to $400 and drop your entertainment target to $300.

If you really wanted to get more detailed about your spending in a certain category, you could break things down further. Say you wanted to know where all of your entertainment spending is going. To find out, you might create sub-categories for movies, concerts, and sporting events.

This is just one way to create a more detailed budget; you need to choose a level of detail that's right for you. I recommend starting broad-maybe just using a basic framework for a month or two-and then adding detail as needed. One reason budgets fail is that people try to get too detailed; so start basic, and then add enough structure to meet your needs. The benefit of starting simple and adding complexity-rather than doing the reverse-is that you add only the details you need instead of being overwhelmed with too much noise at the start.

You're more likely to stick to a budget if the categories you track reflect your situation and spending habits, not somebody else's. Make sure your budget reflects your goals and values: If you want to travel, then budget for travel; if you want to donate 10% to your church, then budget for t.i.thing. The next section has more tips for sticking to your budget.

Frequently Asked Question: When Is It Okay Not to Budget?As valuable as budgets are, not everyone needs one. Some people have mastered their finances, and others have a clear idea of where their money is going. Here are some situations where you may not need to budget: - You have a huge surplus: Your income is far greater than your expenses and you have a large cash cus.h.i.+on in the bank.

- You're meeting all your financial goals: You have an emergency fund, are saving for retirement, and are meeting your other targets.

- You have no consumer debt: You don't carry balances on your credit cards and you don't have a car loan; your only debt is your mortgage and you can afford the payments.

- You don't worry about money: You never feel stressed about your financial situation, fight with your partner about spending, or wonder how you're going to make ends meet.

Even though you don't need to budget if these things are true, it's still not a bad idea to track your spending; a budget can help you see if your rosy financial situation is taking a turn for the worse.

Sticking to a Budget.

There's more to budgeting than just putting numbers down on paper. Drafting your framework and setting up categories is all well and good, but it doesn't mean a hill of beans unless you adjust your behavior accordingly. Whether you stick to your budget depends on how you spend money on a daily basis. The following sections offer strategies that can increase your odds of success.

NoteIt can take time to get your spending to match your budget, so be patient. It may take several months to get the kinks out. If you're struggling, change tactics: Switch from a detailed budget to a loose budget-or vice versa. And if you suffer setbacks, the list on Coping with Mistakes and Setbacks Coping with Mistakes and Setbacks has strategies to help you cope. has strategies to help you cope.

Tracking Your Spending.

If you struggle to stick to your budget (or struggle with money in general), it may help to track your spending. It can be a tedious process, but what you learn about your spending habits makes tracking worth the effort. Without doing this, it can be hard to know how much you've really been spending-and what you've been spending it on.

Tracking your spending demystifies money and puts you in control. You'll have a heightened awareness of your financial habits, which will let you make changes to improve your situation. By looking at the details, you'll have a better sense of your overall spending and begin to understand how your one-DVD-a-week buying habit affects other parts of you your life.

The cla.s.sic book Your Money or Your Life Your Money or Your Life recommends that you keep a daily money log to record your spending. This log can take any form: a pocket-sized memo book, a computer text file, a spreadsheet, personal-finance software-whatever. recommends that you keep a daily money log to record your spending. This log can take any form: a pocket-sized memo book, a computer text file, a spreadsheet, personal-finance software-whatever.

Every time you get money-from a paycheck or a garage sale or by picking up change off the ground-write it down. Every time you spend money-paying bills or buying coffee or paying bus fare-write it down. Keep track of every penny that enters or leaves your life.

NoteWhen you track your spending, it's important not to make judgments. This activity is meant to describe your money habits, not to change them. (You probably do want to change them, but that's a different task.) So write everything down, whether you're proud of it or not.

Some transactions are easy to forget, like when you pay with cash or buy stuff online. To help you remember: - Get a receipt for everything. Make a habit of asking for receipts, and keep them in one place so you know where to find them.

- Record your transactions weekly. Some people track their spending daily, but it can be hard to detect patterns when you look that closely. Besides, daily bookkeeping can be a ch.o.r.e. You'll probably have more success if you record your transactions weekly. A good strategy is to make it a habit-do it at the same time every Sat.u.r.day morning, for example.

This process will show you your actual spending habits-which may not match what you think they are. You can then use this knowledge to fine-tune your budget and set financial goals. At the very least, you'll get a snapshot of where your money has been going.

Frequently Asked Question: How Detailed Should My Records Be?When you first begin budgeting and tracking your spending, it's tough to know how detailed you should get. Should your budget simply include a Food category, or should you break Food into Groceries and Dining Out? Should you track produce separately? If you go to the store and buy a $3.19 bottle of shampoo and an $0.89 pack of bubblegum, should you record both as groceries?The answer is: Track what's important to you. Remember that what gets measured gets managed. In other words, the things you track are things you'll be better able to control.If you think you spend too much on candy, then track it. If you want to know how much you spend on beauty products, track that. But don't go overboard; if you have too many categories, tracking gets tedious. Also, be consistent: If you decide that shampoo counts as groceries because you buy it at the grocery store, then include it in that category every time.

Envelope Budgeting.

The envelope budgeting system is a simple method that you can use with any sort of budget to help you manage your spending. The basic process is this: When you get paid, you put cash in various envelopes designated for specific budget categories. Here's how it works: 1. Choose your categories. You should have one envelope for each category you plan to track. Write the category's name on each envelope.

2. Set money aside. After you deposit your paycheck, withdraw cash for each budgeted category. So if you've budgeted $200 for groceries, put $200 in your Grocery envelope and note the amount on the back.

3. Spend as usual. Throughout the month, take cash from the envelopes to make your purchases. Write your withdrawals on the back: If you spend $77 at the grocery store, note that you have $123 left for the pay period. After you buy something, put the receipt and the change back in the envelope.

4. When an envelope is empty, you're done. If you run out of money in an envelope, you have two options. Hardcore budgeters argue that you should suck it up until your next paycheck rolls around; once you've spent your entertainment budget, that's it. ("How else will you learn discipline?" they ask.) Others say that it's okay to take from one envelope to fund another. Whichever route you choose, the important thing is not to resort to credit-that would defeat the whole purpose of this cash-based system.

5. Decide what to do with the leftovers. At the end of the pay period, if you have money left in an envelope, you can leave it there to bulk up that category for the next round. Better yet, use the surplus to pay down your debt or make a deposit into long-term savings.

6. Do it all over again with your next paycheck. If you discover that you always have a deficit or surplus in certain categories, adjust your budget accordingly.

TipThis YouTube video does a fantastic job of explaining envelope budgets: http://tinyurl.com/envelope-budget. The Frugal Dad blog has a more in-depth explanation of the system: http://tinyurl.com/frugal-envelope.

You can use this method whether your budget is simple or complex. If you don't want to ha.s.sle with actual envelopes-or carry around large amounts of cash-check out Mvelopes (www.mvelopes.com) or YNAB (www.youneedabudget.com), software that lets you manage your budget using virtual envelopes; learn more on Web-Based Tools Web-Based Tools.

Think Yearly.

If you're having a tough time staying within your budget, the problem could be that you're trying to predict your spending over too small a time frame. A study published in the Journal of Consumer Research Journal of Consumer Research in August 2008 found that folks who made annual budgets did a better job of predicting what they'd spend than those who made monthly budgets. in August 2008 found that folks who made annual budgets did a better job of predicting what they'd spend than those who made monthly budgets.

Yearly budgets are more accurate because people consider more expense categories when thinking long-term. If you build a monthly budget in April, for example, will you remember to include a category for Christmas gifts? If you instead take the whole year into account, you'll remember to include stuff like that.

The downside of yearly budgets is that they aren't very useful for planning day-to-day spending. The solution is to get the best of both worlds: - Create an annual budget first. It's easier for most people to estimate yearly expenses than monthly ones.

- Make a monthly budget based on your annual one. Once you have your annual budget, divide the estimated expenses in each category by 12 to get monthly numbers.

Voila-you've got yourself a monthly budget that takes seasonal expenses into account.

Automating Your Budget.

Whether you use a simple budget or a more detailed one, do yourself a favor and automate the budgeting process.

The past two decades have seen a revolution in personal finance. It used to be that you had to balance your checkbook by hand every month. You'd take your bank statement, your receipts, and your checkbook register, record all of your transactions, and then try to make sure everything matched; it was a laborious and often maddening process. And if you tried to keep a budget at the same time, it could be even more frustrating.

Some people like using pencil and paper to track their money; for the rest of us, personal-finance programs make it easy to track spending and build a budget. Your biggest decision is whether to use software you install on your computer or an online program. The next two sections explain your options.

Desktop Software.

A few years ago, you could choose from several well-known personal finance programs for your computer, but now there's only one: Quicken. With the extinction of Microsoft Money, Inuit's Quicken is the last major money-management program out there.

Despite being the sole survivor, Quicken is far from perfect: It has some bugs, it has so many features that it can be overwhelming, and many people report being frustrated with Intuit's customer service.

These caveats aside, if you want to automate your finances offline, Quicken is a great option. You can enter transactions just like in a checkbook register, or download account data from your bank or credit-card company. The program also lets you track your investments and create budgets. And Quicken offers a wide range of reports, charts, and graphs to help you see where you've been and where you're going.

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Quicken is available in lots of versions for Windows computers and Macs; figuring out which is which and how much they cost can be confusing. Don't sweat it: For most people, the cheapest version works just fine. Pick up a copy at Amazon.com or your local office-supply store.

But Quicken isn't your only option. You may want to check out these lesser-known programs: - Moneydance enjoys a fine reputation among the folks who use it. It has lots of features and can read various Quicken file formats in case you're looking to make a switch. You can set up Moneydance to talk to your bank, manage your budget, and track your investments. It costs $40 and is available for Mac, Windows, and Linux computers. You can download it from http://moneydance.com.

- You Need a Budget lets you download info from your bank, schedule recurring transactions, and budget for the future. The program has a variety of budget-related features, including a virtual envelope system. It's available for Macs and Windows computers; you can download it from www.youneedabudget.com for $60. for $60.

There are other desktop programs out there, but they seem to be a dying breed. Web-based tools (covered next) now rule the roost.

TipFor a list of 16 great personal finance programs (both the online and desktop variety), head to http://tinyurl.com/PFprograms Web-Based Tools.

If you're comfortable using web applications, you can choose from at least a dozen online personal-finance programs. Most of the sites on the following list are free, and many of them feature blogs with financial advice and important money-related news. Though they all have similar features, each one has its own special twist. Many also offer iPhone applications so you can track your money while you're on the go.

- BudgetPulse (www.budgetpulse.com) bills itself as "the free and upbeat way to manage your money." This site doesn't sync with your bank (which helps if you're worried about ident.i.ty theft), but you can upload files from Quicken or your favorite spreadsheet program. BudgetPulse can be used by anyone in the world (not just Americans). One of the site's stated goals is simplicity; it doesn't do a whole lot other than track your major accounts.

- Mint (www.mint.com) has become the Big Daddy of online personal-finance programs, with more than a million registered users. (It was recently acquired by Intuit, the folks behind Quicken.) Mint can help you track investment accounts, which is a cool feature not all sites have. It also includes basic budgeting features, automatic synchronization with your bank accounts, and can display your financial info in spiffy graphs. (Downsides? You have to enter your bank account pa.s.swords, and Mint doesn't work for accounts at many small banks.) There's a Mint iPhone app, too.

- moneyStrands (https://money.strands.com/) lets you set up budgeting goals and create custom alerts (like "let me know when I've spent $30 on coffee this month"). And if you'd like to manage your finances in Spanish, you're in luck-there's a setting in moneyStrands that'll let you track your cash en Espanol. There's also an iPhone app available.

- Mvelopes (www.mvelopes.com) is a web-based version of the envelope budgeting system (Envelope Budgeting) that lets you allocate your money to virtual envelopes. Mvelopes automatically connects to most banks and lets you pay your bills online. The site isn't free: Monthly fees range from $8 to $13 depending on the length of your subscription. Despite this fee, many find that Mvelopes helps them take control of their money when all else has failed, so it's definitely worth a shot if you're at your wits' end.

- PearBudget (www.pearbudget.com) doesn't pretend to be a total financial-management package. It's streamlined so it just lets you do simple budgeting and expense tracking, but it does a great job of that. It costs $3 per month, but there's a 30-day free trial. (There's also a PearBudget spreadsheet you can download for free from www.pearbudget.com/spreadsheet.

- Wesabe (www.wesabe.com) was the first online personal-finance program. It has a dedicated fan base; in fact, one of Wesabe's strengths is its active community: people on the site support each other, sharing tips and ideas. This program lets you track cash accounts (how much money you have in your pocket), something most other online programs don't do. Also, Wesabe is very security-conscious: If you don't want the site to automatically sync with your bank, you don't have to let it; you can upload data manually instead. And yes, there's a Wesabe iPhone app.

- Thrive (www.justthrive.com) is designed to help you plan for the future. It offers budgeting tools as well as reminders about when to pay bills and how much to pay. The site also sports features to let you set and track savings goals.

- Yodlee MoneyCenter (www.yodlee.com) lets you track your spending and set budget limits; view balances and transactions for banking, credit, and investment accounts; and pay bills with your checking account or credit card.

Why Budgets Fail.

As you've seen, building a budget doesn't have to be a ch.o.r.e; you can use a variety of tricks to make the task more fun and more personal. All the same, simply creating a budget doesn't guarantee that it'll work; a lot of people try to budget, and a lot of people fail. You may encounter trouble with your budget if: - It's too complicated. Folks tend to make budgets more complicated than they need to be. Keep it simple; include only the details you need.

- It doesn't reflect your values. Chapter2 Chapter2 helped you figure out our financial goals. A budget is meant to help you achieve your goals, so make it personal. For example, if you want to budget for fancy coffee, add a category for that. But don't just drink the stuff out of habit. helped you figure out our financial goals. A budget is meant to help you achieve your goals, so make it personal. For example, if you want to budget for fancy coffee, add a category for that. But don't just drink the stuff out of habit.

- It doesn't reflect reality. Too often budgets are based on wishful thinking-possible salary increases and ideal spending habits. These are doomed to failure. When you draft a budget, build it around your actual income and behavior. If you spend a lot of money on CDs and MP3s, then budget for music. And don't count on a raise you haven't received yet.

- It seems like a ch.o.r.e. It's important to review your budget regularly, but don't let the system bog you down. If checking your progress feels like a ch.o.r.e, you won't do it. So use a pencil and paper if that works for you, or download a budget app if you're an iPhone addict. Your goal is to have a budget that works-so pick whatever method suits you.

The truth is your spending will rarely be in line with your expectations, especially if you have a detailed budget. Sometimes you'll overspend on a category; other times, you'll underspend. Life doesn't stand still, so just make your best guesses and when you're wrong, make adjustments. It's nothing to be discouraged about. The point is to keep learning and keep improving.

Remember: Your goal isn't to keep a budget, it's to live a rich and happy life. Your budget is merely a tool to help you build a successful financial life. Just as you have to tinker with your lawnmower-adjust the belts, change the oil, sharpen the blade-so too you'll need to adjust your budget from time to time.

On The Money: Make It a HabitIn Chapter1 Chapter1, you learned that habits and routines make people happier (Living a Rich Life). In Chapter2 Chapter2, you learned that habits help you achieve your goals. Let's go for the habit trifecta. When you first start using a budget, it's easy to be overwhelmed. The best way to avoid this? That's right: Make budgeting a habit.Designate a time and a place every week to review your budget (you can call it "doing your finances" if you think that makes you sound nice and grown up). This routine will help you cope when something unexpected comes up-and you know it will. Remember: When your goals are specific, you know exactly what you're supposed to do-and you're more likely to do it. So make budgeting once a week one of your goals and you'll be more likely to follow through. Without such a plan, it's all too easy to slip back into the habit of not budgeting at all.

How you think you spend money is likely very different from how you want to spend it-and how you actually spend it. A budget can help you bring these three into alignment.

The next chapter will teach you how to defeat your debt so that you can begin to save for the things you really want.

Chapter4.Defeating Debt.

"It gives much more pain to the mind to be in debt, than to do without any article which we may seem to want."-Thomas Jefferson Let's be honest: There's no quick and easy way to get out of debt; it takes time and effort. That said, it can be done-and has been done by millions of people just like you.

Before you can begin to destroy debt, you have to understand the basics of cash flow, since cash flow problems were what got you into debt in the first place. After you've got that concept under your belt, you can begin to focus on reducing debt. Although there's just one basic debt-elimination process, you can apply it in a couple of ways. The key is to find the method that works best for you. This chapter explains your options.

The Power of Positive Cash Flow.

"The first step to happiness is spending less than you earn," write Arun Abey and Andrew Ford in How Much is Enough? (Greenleaf, 2009). You've probably heard that before, and if you're in debt, you might think it's lame advice. But the truth is, spending less than you earn is the key to all personal finance.

When you spend more than you earn, there's never enough money to go around. You're always $50 or $100 short of what you need, and you fall further behind every month. You end up spending money you don't have-using credit cards, taking out loans-which leads to more debt, which puts you deeper in the hole.

You can't possibly get ahead when you spend like that. The math simply doesn't work. In order to save money and pay off debt, you need to spend less than you earn. Although it's easy to understand this intellectually, it's only when you actually see the concept applied to your own life that you'll be able to appreciate the power of positive cash flow.

Cash Flow Basics.

If "cash flow" sounds like an accounting term, that's because it is. But don't let that scare you-it's easy to understand. For any given time period: CashFlow=Whatyouearn-WhatYouSpend.

Simple, right? That's second-grade math. But don't let the simplicity fool you-this is a powerful concept. This formula tells us two things: - If you spend more than you earn, you have a negative cash flow. You're losing wealth and in danger of going into debt-or, if you're already in debt, you're digging the hole deeper.

- If you spend less than you earn, you have a positive cash flow, which will let you climb out of debt and build wealth.

The greater the gap between earning and spending, the faster you build (or lose) wealth. This may seem obvious, but smart personal finance really is this simple. Everything else-clipping coupons, saving for retirement, asking for a raise-is done in support of this basic idea.

TipOnly two things will increase your cash flow: spending less (Chapter5) and earning more (Chapter6).

Here's an example: Joe Spendsalot has been living paycheck to paycheck, making minimum payments on his $5,000 credit card debt. Joe brings in $2,500 per month after taxes, but he spends $2,600 a month, including $100 per month on his credit card bill, which barely covers the 15% interest. Because he spends more than he earns, his cash flow is negative, and he's sinking into debt.

Salary .

$2,500.00.