Wise Use of Credit Cards

As we have mentioned before, credit cards can be a good thing, or they can be a bad thing. If you are one of those people who simply cannot control your spending when you have plastic in hand, then cut up all your cards and use checks, cash, or debit cards. This will limit your spending to what you actually have in the bank. You can still get in trouble if you spend all your money on frivolous stuff, leaving no money for essentials later. But at least you will be somewhat limited on the amount of debt you accrue.

If, on the other hand, you have a handle on spending, credit cards can be very useful. First off, they allow you to easily pay for things without having to immediately deduct money from your bank account. If you pay off the credit card bill each month in a timely manner, it basically amounts to an interest-free short-term loan. But if you plan to build up a balance on a card and then pay only a portion of it each month along with interest payments, then forget about using credit cards. The interest on credit cards can be pretty steep. You don’t want to get stuck making these hefty payments if at all possible.

Here’s what we personally look for in credit cards. REWARDS!! A card must not have an annual fee, unless the rewards paid by the card more than compensate us during the year. Currently, all the cards we own have no annual fees. Also, the card must allow us to pay it off in full each month with no interest or penalties. In other words, the cost to us for the card’s use must be zero, but additionally it must pay us back. In essence, the credit card company should be paying us for using their card. Another feature to look for is the ability to have the credit card company automatically withdraw the total amount due from your bank account each month. This prevents you from accidentally being late making a payment, resulting in interest and late fees. Just make sure you have enough money in your bank account to cover the withdrawal when the bill comes due. We set up monthly reminders on our electronic calendar for this purpose.

Some cards pay back a percentage of each purchase regardless of where the purchase is made. Other cards give rewards based on the type of purchase. Common ones are for gas stations, grocery stores, and drug stores. If you travel a lot, some cards give rewards that can be used for airline flights. Also, some businesses team up with Visa or MasterCard to provide a card with rewards, particularly if you use the card at the business. Some businesses have their own credit cards that can only be used at their stores.

If you look around, you can find some pretty good deals on cards. Here are a few we use that you might want to look at. Please be aware that the description of the rewards we receive with these cards can change at any time. In fact, we have occasionally quit using cards when they change their rewards programs to be less desirable or when better cards come along to supplant them.

 

Fidelity Investments American Express

This is a good general use card because it pays a flat 2% cash back on all purchases. In order to get this card you will have to set up a Fidelity Investments account. The rewards can be deposited into either a taxable account, an IRA, a college savings plan, or sent to the cardholder as a check. However, the full 2% is only available in check form if we let the rewards build up to at least $250. We use this card for all purchases except for those where we get a bigger reward using another card. The one disadvantage of this card is that quite a few businesses, especially small local ones, do not accept American Express cards due to their higher merchant fees.

 

PenFed Platinum Rewards Visa

This card is issued from the Pentagon Federal Credit Union. This account is primarily designed for government, particularly military, personnel. However, we were able to make a donation to an organization that supports military families, and that allowed us to join. You must also set up a savings account with the credit union and make at least a $5 deposit. However, the rewards are well worth it. You get 5% back on pay-at-the-pump gas purchases, 3% on supermarket purchases, and 1% elsewhere. We only use this card at gas stations, supermarkets, and any place that does not accept American Express. Gas companies, such as Shell and BP, sometimes offer credit cards that have 5% rewards on purchases made at their stations, but we much prefer having one card that gives us 5% back for gas purchased anywhere.

 

Discover

Normally the rewards paid by the Discover card are not as large as those from some other cards. However, every few months, special 5% bonuses are offered on certain purchases. For instance, it will soon be offering 5% cashback bonuses at restaurants and movies. One caveat is these specials always have spending caps. We only use Discover when the special offers are better than what we can get with any other card. Points earned with the Discover card have to be redeemed with gift cards. Some cards can be purchased for less than their face value. One of our favorite ways to cash in our Discover points is to get a $50 Chili’s Grill & Bar gift card in exchange for $45 in points.

 

Best Buy MasterCard, Amazon Visa, Etc.

Some businesses offer credit cards that give you substantial rewards for use at their store. For instance, the Best Buy RewardZone MasterCard offers a 4% reward for purchases made at Best Buy and 1% elsewhere. Amazon’s Visa card offers 3% rewards for Amazon purchases, 2% for certain types of other businesses, and 1% elsewhere. Many times the rewards come as vouchers that can be used at their store rather than as cash. However, if you make regular purchases at these stores, that’s as good as cash.

 

Store Cards

Some stores, such as Kohl’s, JCPenney, Sears, and others, offer credit cards that can only be used in their respective stores. Under normal circumstances, these cards generally don’t offer any incentives for their use. However, occasionally the stores will offer sales that can only be taken advantage of when using their card. It can be very useful under those circumstances, especially given that they usually give the discount at the time of purchase. Still, we do not bother with a card from a store we shop at infrequently. Oftentimes a store will offer a steep discount on the entire current purchase for opening a credit card account with them. We sometimes do this if we are making a large purchase and the discount is substantial, but normally we take a pass on these offers.

 

Student Cards

Some credit card companies offer cards that are geared toward college students. They will typically offer rewards on purchases that are of interest to this age group. Our son uses the Citi Forward Card. It should go without saying, but we’ll say it anyway. If your college-age child is not very responsible with their spending, DON’T give them a credit card. BAD IDEA!

 

There are many, many different types of credit cards on the market to meet the needs of essentially every type of spender. We have mentioned only a few that we have found to be useful. For others, check out the Credit Card Guide.

Keep in mind that the deals can change frequently. The rewards we mentioned earlier may not be available by the time you read this. Also, there may be cards available that we would like better, but just haven’t happened onto them yet. Indeed, if anyone reading this finds a great credit card, be sure to let us know about it.

If you use credit cards at a lot of different businesses, you may find that to maximize your rewards, you may need to have a plethora of different cards. This can become unwieldy. Sometimes you just have to say, “No more cards.” Decide how many cards you are willing to keep up with, determine which ones will benefit you the most, and go with just those. If you occasionally order merchandise from Internet sites that you are not totally confident in, you will want to have one credit card with a low spending limit so nefarious individuals who might decide to use the card will be limited on what they can spend.

Speaking of credit card theft, be sure to find out if you are responsible for some amount of money should a card be lost or stolen and then used by someone else. If seems to us that most companies’ cards these days do not require a fee from you under these circumstances. Another thing to be aware of is that some cards cap their rewards. This is okay. Just remember to switch to a different card once you reach that cap because you will no longer receive any rewards on purchases that exceed the cap. And again, watch out for those annual fees and penalties.

Happy credit card shopping. May your balances be paid in full each and every month.

Cutting Expenses Part 2

An area where cuts can help a lot with your bottom line is utilities, primarily heating and cooling. Of course, the cost of utilities vary greatly depending on where you live, both because of the climate and the cost of power. The latter varies greatly with the source of power. Several years ago the cost of natural gas became extremely high and people who used it were wishing they could heat with electricity. Now, natural gas prices are down, and the reverse is true. But apart from the type of energy you use for heating and cooling, the only real way to control its usage, assuming your house is insulated properly, is to lower the thermostat in the winter and raise it in the summer. (And by lowering and raising, we do not mean moving it close to the floor in the winter and near the ceiling in the summer.) We know this can be difficult, especially for older people. We used to keep our house at about 70 deg in the winter, but as we aged, this became unacceptable. So, now we keep it at 73 deg. Right now we can afford that, but should prices rise, we may have to resort to using space heaters just in the part of the house we are currently in or bundling up more. We have always kept the house at 78 deg in the summer, but Randy has to supplement with fans to be comfortable as he is more warm natured than Kathy. Anyway, in your case, you just have to find a balance between comfort and your checking account.

Other big power users are stoves, ovens, and clothes dryers. So, if you can limit the usage of stoves and ovens for cooking, you can save money. But if you make the alternative to eat out, then you’ve just shifted a few dollars in savings on utilities to a lot of dollars of non-savings on food. One thing we do is to use a toaster oven for smaller items rather than heating up the big oven. If push comes to shove, the clothes dryer can be eliminated altogether by using the old fashioned method of drying: hanging on a clothes line in the back yard. This may not be feasible when the weather is bad, but we can remember as a child having clothes hanging on racks around the house when it was raining. And we can also remember having ice on our clothes when they were hung outside and the weather turned cold unexpectedly. The point is: use your best judgment about when to use certain types of energy. If your budget is tight, these are the types of decisions that must be made on a daily basis.

Little things you can do include: turning off lights and devices when not being used, letting sunlight into the house in the winter and blocking it in the summer, putting insulation on your hot water heater, using fluorescent bulbs rather than incandescent, taking fewer hot showers in the winter, and hand-washing dishes rather than using a dish washer. In general, just become more aware of how you are using energy around the house and cut where possible.

Another area for a large potential in savings is communications. Are you paying for a landline phone service? Cell phone service? TV service? Internet service? Pager service? There are so many communication services available, it can eat up a lot of money. When it’s all said and done, you could eliminate all these services and still live well. It wasn’t that long ago that many of these services didn’t even exist. We know that in our modern society these things all seem essential, but in reality they are simply just desirable. Even if you decide you don’t want to rid yourself of any of these conveniences, there are ways to lower your cost.

Consolidate. If you have landline phone service with one company, cell phone service with another, and Internet service with yet another, then you can most likely save quite a bit of money by consolidating these services with one company. We just recently rolled our landline phone, TV, and Internet service into a bundle with one company. We will save about $80 per month for the first year and about $40 per month from then on. If you really don’t want to change service, we have heard about other people talking to the companies they currently have service with and asking for a good customer discount. Many times they will give you the same price they offer to first time customers for a year. If asking doesn’t work, you can tell them you are planning to switch your service to another company unless they can give you a better price. Although we still like having a landline phone, we have a lot of friends and family that have dropped this and converted totally to cell service. This can save you money for sure, especially if you bundle the cell service with TV and Internet service.

Another great money drainer is transportation costs. The current high cost of gasoline is driving much of that. However, if you have a proclivity for new expensive cars, most of your problem may be high car payments. If you are on a tight budget, you have no business buying expensive cars. Go for the lower cost vehicles that get high gas mileage. If you can find a decent used one, then you can save even more.

Buying used is what Dave Ramsey recommends, but we personally like buying new vehicles and driving them until they break down and are too expensive to repair and maintain. However, we do invest in having our vehicles serviced regularly, believing that this will prolong the life of the vehicles and thus save us money over the long run. But that’s us. We have a relatively decent income and have been able to afford new cars when needed. However, our son owns a used car and it has served him well now for several years. If our income were lower and we were in need of a vehicle, we wouldn’t hesitate buying used. Also, if you have the skill and the time, you might want to do some of the servicing yourself to save money.

If you live a long distance from your job, you seriously need to think about carpooling to save money. We know this can be inconvenient, but if saving money is your goal, it will be well worth it. If you use public transportation, you might consider riding a bicycle or even walking, if possible and the weather permits.

Be creative. Record how you are spending your money and put together a plan on how to reduce that amount. You must begin to be totally honest with yourself about what is really needed and what is merely wanted. Thinking that something is needed rather than simply wanted leads many people to becoming impulse buyers. They’ll go to the store to pick up a few needed items and leave the store with three times as many wanted items as needed items. This is not good. But some people have a bad habit, or even a compulsion, to rationalize to themselves that a wanted thing is really a needed thing. Like, “I really need an iPad. It’s so much easier to play solitaire while riding down the road than using cards. And I can check my Email without having to get on my computer.” Come on now. That’s not a valid reason. Unless you need an iPad to do your job, then it remains a luxury item for those that want it and can afford it. If you don’t have the money, let the iPad remain at the store. Then have a long discussion with yourself. Conduct an intervention if you will. On YOURSELF. Tell yourself, “I don’t really need all this stuff, I just want it. So, get over it, self! Quit borrowing money to support my spending habits. I’ll be glad I did.” Once you have these ideas firmly planted inside your head, you will find that you really can leave those wanted items on the store shelf. If you find that you cannot, then you may need to seek professional help.

So, let’s stop here. We hope you take these suggestions to heart and that it helps you to live within the budget your income allows.

Cutting Expenses

One thing that can destroy relationships quickly is the mishandling of finances. Soon after marrying my wife almost 30 years ago, she told me she wanted us to start a budget. She had heard that one of the most frequent things couples argued about and got divorced over was money. Although I was a bit skeptical, she soon persuaded me that we should have a budget. In those days, home computers were expensive and rarely seen. So our first budget was done using a ledger book. Later, when the Commodore 64 became widely available, we bought one and began keeping our budget in a spreadsheet. This made budgeting much easier and less prone to errors.

Now, after nearly 30 years, we still keep a budget and very much believe in them. It has helped keep us on the straight and narrow when it comes to spending our hard-earned dollars. However, creating a budget is easy; living by it is another matter. For those of you fortunate enough to have relatively good salaries, sticking to a budget may not be difficult at all. However, for those that struggle daily with having enough money to live on, living by a budget may be extremely difficult. For that reason, we now present some ideas on how to cut your household expenditures.

First and foremost, whatever you do, DO NOT look to the federal government for an example of how to run your household. Our leaders have gone bonkers over the last 50 years and are about to drive our entire country into bankruptcy. Did you know that our national debt has now exceeded $15 trillion and that it is projected to increase by about $1.1 trillion in fiscal year 2012 alone. Because of this debt, we spend almost $500 billion a year in interest. Yet, revenues are only expected to be about $2.6 trillion. Let’s scale these numbers down to the average household in the US and see what they look like.

Household income:   $50,000

Total existing debt:   $288,462

Additional debt for 2012:   $21,154

Interest to pay in 2012:   $9,615

Can you imagine being in a situation where you are spending almost 20% of your income just to cover the interest on your debt? Perhaps you can. If you are young and just getting started on your career, you could be in debt this much because of a mortgage and car loans. But keep in mind these are loans you are working to pay off without incurring additional debt (unless you are going wild with the credit cards). But what if you only paid the interest on your debt, never paying anything on the principle. Then, on top of that, you buy new $20,000 cars every year and start making interest payments on them also. This is what the federal government is essentially doing. It is completely unsustainable. The party has to end at some point, hopefully without too much of a hangover. Therefore, we have decided to help you cut your spending should you find yourself in a situation where this is necessary.

The first thing to think about is the absolute essentials of life. These are normally considered to be food and shelter.

Yes, you need a dwelling place. But do you need one as expensive as the one you have?  If you find yourself hating that dream home you own because the cost of the mortgage, taxes, insurance, and upkeep are eating into your lifestyle, it may be time for a change. We like having a DREAM LIFE more than having a DREAM HOME. Of course, it may still be difficult to part with the home, so the first thing to do is to see if you can reduce the mortgage payments by refinancing. You have to be careful here because closing costs can be so high as to negate any benefits of a lower interest. Also, you may find yourself in a situation where the value of your home is less than the amount you owe. But if the overall housing market is depressed in your area, it could still be feasible to greatly reduce your cost of home ownership by selling your existing home at a loss and buying a much lower cost home. Because there are so many factors affecting cost, it is a good idea to consult with a real estate professional about your options.

I have mentioned the cost of food in previous posts. This is the one area that our family tends to have the most problems since we enjoy eating out so much. One of the reasons we shy away from home meals is the time it takes to prepare them and clean up afterwards. We have a fairly busy lifestyle and don’t like taking that big a chunk out of our leisure time. Sure, we could just heat up a can of soup, but we like variety. Some foods simply take time to prepare.

One thing that helps us to eat at home more is planning a week in advance what we will have each night. This allows us to purchase what we are lacking ahead of time and have everything ready to go each evening rather than having to make a run to the grocery store on the spur of the moment. Also, we can plan easier meals for busy nights and more elaborate meals for free nights. If, however, you are on a really tight food budget, planning ahead will be only one step in your savings plan. You may also have to greatly cut back on more expensive food items such as steak, or at least concentrate on the cheaper cuts. We have discovered that even fresh fruit can be expensive because many times the fruit is not good or it spoils before we have time to finish it. Canned and frozen items are better choices for longer term storage.

You might want to start couponing. It’s also a good idea to look for deals on more expensive food items that can be frozen. We buy a large quantity of meat when on sale, vacuum seal it, and put it in the freezer. But if push comes to shove, you may regrettably have to cut out eating some foods that you really like. Better that than going broke.

Another area that can be problematic is the purchasing of technology items. Just look around. Big screen TVs (now with 3D!), stereos, Blu-ray players, cable service, satellite service, computers, laptops, printers, tablets, wireless phones, cell phones, iPods, iMacs, iPhones, iPads, iThis, and iThat. Temptation is all about. Our household consists of tech geeks, liking all these new gadgets. Yet, when you think about it, are they really necessary. No, they are not! If you find yourself spending thousands of dollars you do not have on technology, STOP IT! This is an intervention. Look seriously at what you are spending on these items and scale back to only what your budget allows. You might also consider selling some of your existing stuff on eBay. We’ve got a Nintendo Wii and accessories waiting to be sold right now. Anyone interested? Only those who can afford it need apply.

Look for more savings tips in the next post.

Adjusting Expenditures Part 2

We now continue with adjusting expenditures in the remaining budget categories.

Insurance
This category may be difficult to reduce. You really need most of the types of insurance mentioned before in order to avoid debilitating debt should tragedy strike. Even so, with diligence some cuts should be possible. For instance, you might want to cut back on the amount of life insurance you have on family members. Some life and health policies allow discounted rates for people in good health. By exercising more and eating better, you might be able to qualify for these discounts. As a “side” benefit, you’ll feel better, also. By shopping around, you may find another insurance company that is cheaper than the one you currently use. A combination of these suggestions could get the cost of insurance down from $400 to $350 per month.

Debts
If at all possible, you don’t want to reduce your allotment of money for paying off old debts. Instead, you want to increase it to pay them off faster. For now, just leave the amount at $200 per month.



Personal
Whether you like it or not, you’re going to have to reduce the amount of money you spend on yourselves and your children. To become financially secure, such sacrifices are needed. Try cutting your monthly expenditures on each person in half; from $200 per person per month to $100. No, you won’t be able to buy new clothes as frequently or go to as many movies, but in the end you’ll be better off. Perhaps the family can stay at home and play games rather than going to a movie or a concert. Be creative, and cut that spending.

Miscellaneous
Since this category is for unaccounted for and unexpected expenditures, it will be difficult to know how much the allocation for this category can be cut. So, just leave it at $50 per month.

Credit Cards
If there is any category not to cut, it is this one. Most likely, your credit card debt is costing you more in interest than any other debts you have. Why pay all that money in interest when it could be used for buying things to better your family. You really want to pay your credit cards off as soon as possible. But, given there are other things you also need money for, there is only so much you can do. So, for now, leave the allocation for this budget category at $500 per month.

Savings
So, how did we do? With these reductions in your budget categories, how much money will you be able to save each month? The table below shows the original budget alongside the new numbers.

Wow! Can you believe that we were able to cut your monthly budget by over $1000 per month? With those cuts, you can now begin to save almost $300 per month rather than going further into debt to the tune of almost $800 per month. That is tremendous. And to make all these cuts more palatable, let’s look at how your finances will look in five years after paying off your credit cards and other debts (except your mortgage), assuming your income remains constant.

Again, Wow! Once you pay off your debts, you will be able to start saving almost $1000 per month. What would you do with an extra $12,000 each year? You’ll probably want to up your mortgage payment to get it paid off faster. You’ll also probably want to increase the amount of personal money you have available as a reward for a debt reduction job well done. Just don’t go overboard with these increased allotments. You don’t want to get back in the same financial condition you just worked so hard to get out of.

Next, we will discuss how to set up a spreadsheet for easily handling your semimonthly budget.

Expense Categories

When deciding what categories to use when splitting your expenses up for your budget, it’s a good idea to start with some broad ones. Should it turn out that you are lumping too many expenses into any of these categories, those can be divided up later to better refine your budget. Over the 29 years that we have been budgeting, we have modified our categories many times based on spending patterns and life style at the time. For instance, when our son was born, we had to create a category for costs associated with his care. When we finally paid off our mortgage a couple of years ago, we modified our mortgage category. The point here is that you don’t have to get the categories perfect from the get-go. You can hone them to perfection later and then modify them as necessary.

So, where should the money in these budget categories actually reside? We suggest a checking account with a financial institution like a bank or a credit union. While we know some families that like to keep separate checking accounts, we believe our budgeting system works best with just one account. This allows you to total the balances of all the budget categories and see what the current balance of that one checking account should be. Reconciling your money is easy in this case. But if for some reason you really need to have more than one checking account, it can still work. You will just have to decide which budget categories are associated with which checking account.

However you decide to divvy up your money between accounts and budget categories, we can’t over emphasize the trust factor. Total trust in each other is essential. If all parties are not 100% on board with the agreed upon budget, things can go awry quickly.

Here are a few categories that we suggest starting with:

Charity, Gifts, Mortgage, House Upkeep, Home Decorations, Utilities, Communications, Food, Medical, Transportation, Insurance, Debts, Personal, Miscellaneous, and Savings.

The Charity expense category should include any money you donate to charitable organizations such as your place of worship, medical research organizations, etc. Some of you might like to divide this category into two: one for tax deductible donations and another for non-tax deductible donations. This is fine but it might be a bit difficult budgeting between the two if you don’t know in advance how you will be splitting your money between the two. Personally, we just add (ntd), meaning not tax deductible, to the name of organization if it is nondeductible. If you and your spouse like to support different charitable organizations, you might want to split this category into two, one for each spouse. This will help prevent disputes over whose charities are getting the most money.

The Gifts category covers expenses for others. This would normally be for such things as Christmas, birthday, and anniversary gifts, but could also include taking friends out to dinner.

The Mortgage category is for the cost of paying back the loan on your house. If you are renting, then this category is for your rent payment. A mortgage payment usually includes an escrow account for paying your yearly property tax and homeowners insurance. So, when you reach that point in life when you have your house paid off, don’t forget that this category cannot be totally eliminated. You will still need to set aside money for taxes and insurance since you will be paying for these yourself rather than through the mortgage holder.

Originally we had the categories House Upkeep and Home Decorations combined into one category called House. House Upkeep is for anything you pay for that results in maintaining your house and property. This could include such things as plumbing and electrical repairs, lawn care, painting walls, and so on. Home Decorations is for things to make your home look better such as wall hangings, flowers, plants, furniture, and so on. The problem we had with combining the two categories was that Kathy shied away from using any money from the House budget for decorations for fear that the money would be needed down the road for repairs. Of course, simply dividing the category into two did not reduce the chances that repairs would be needed, but it did free Kathy to buy things for our house, knowing that we had both agreed that the amount allocated to the Home Decorations category was available for spending on decorations.

Utilities mainly include the cost of providing power to your house in whatever form that takes. It could be electricity, natural gas, and maybe even wood, oil, and propane. Additionally, it includes the cost of water, sewage, garbage pickup, etc. if your city or county charges for these services.

The Communications category covers the costs of landline phones, cell phones, pagers, TV, and Internet connection. Basically any services that allow you to communicate with the world or the world to communicate with you. We personally have landline phones and Internet service with one company, cell phone service with another company, and TV cable service with a third company. Therefore, we divide the Communications category into two: Phones and TV. However, since many companies now provide all these communications services in one big package, we are suggesting just this one category. But, if you so desire, you can divide it out as we do or in any way that makes sense to you.

Food is our favorite category. We love to eat. For this reason, it is the category we struggle with the most. Oftentimes we find we have spent more than we budgeted. Then we have to try to spend less to compensate. Keep in mind that this category covers both grocery stores and restaurants. Of course it is generally less expensive to buy food and prepare it at home, but that really depends on what you eat and where. For instance, it may be cheaper to eat a burger and fries at a fast food restaurant than to prepare steak at home, especially if you have restaurant coupons. Also, keep in mind that when eating at home you will be increasing the cost of utilities by using the stovetop, oven, and microwave, as well as using hot water for washing dishes. The key is to find the proper balance of eating in and dining out that works for your family.

Now for the dreaded Medical category. This is one category for which we hope your family needs to budget very little money because you are all very healthy. In reality we know that just one major incident can result in a huge bill. Hopefully, you have medical insurance that will cover the majority of your medical bills. This category will need to cover the cost of doctor’s visits, dental work, hospital stays, medicine, etc. Inherently this is a difficult expense category to budget for since there is no way to predict your family’s medical future. So, we suggest reviewing your medical expenses from the past and use them to predict future expenditures. If you don’t have these records, you will have to set a Medical budget that seems to make sense, then refine it as medical expenses occur over the following months.

In our modern society everyone needs a means to get from one place to another, and there are costs associated with doing so. This is what the Transportation category is for. It will need to include car payments, gasoline, vehicle upkeep and repairs, etc. If you are in a situation where you don’t own a vehicle and depend on public transportation, then you need to budget for bus, subway, and taxi fares. Don’t forget the tips! Also, if you don’t have wheels and need to go on a trip, you may need to get a rental car. If you do this on a regular basis, be sure to include money in this category to cover those expenses.

Some people, for the sake of saving money, like to take a risk and have no Insurance. For this reason, some states make certain types of insurance mandatory. For instance, in my state of Alabama, auto liability insurance is mandatory for anyone who drives. There are many kinds of insurance. To eliminate all risks you face in life would cost a bundle of money. There’s life insurance, vehicle insurance, homeowners insurance, medical insurance, dental insurance, vision care insurance, long term care insurance, and even pet insurance. There’s also flood and earthquake riders, personal articles riders, umbrella policies, cancer policies, burial insurance, and on and on. Unless you have a really good income, having all these insurance policies and riders would eat up a significant portion of your take home pay. In this case, decisions have to be made about which policies are the most important. Most people consider medical, homeowners, and vehicle to be essential. But even these can be expensive. So, choose wisely and in a way consistent with your budget.

Hopefully you do not need to budget any money to the Debts category, but the option needs to be here in case you do. This category does not include credit card debt. This will be covered separately later. It also does not include debts on your house, which is included in the mortgage category, or debts on cars, which is included in the Transportation category. However, all debts besides these should be included here. Examples of what might be included are student loans, personal loans from friends and family, loans for buying that dream stereo system you probably shouldn’t have bought (Randy had one of these loans back in the day), and other similar debts.

The Personal category is for individual family member expenses. We suggest you have a separate category for each family member. In our case we have three personal expense categories: one for Randy, one for Kathy, and one for our son. If you have children that are attending a private school or a university, then you may also want to create yet another budget category named Education and allot money for it separately. Personal expenses include such things as clothes, haircuts, movies, concerts, etc. In other words, any expenses that relate back to personal needs and desires. Some people like to set up a separate Entertainment category for the entire family. That is perfectly fine, but we decided that we like holding each person accountable for their own entertainment expenses. If one person chooses to buy a lot of clothes, he or she may have to forego movies to compensate. If others buy a lot of video games, they may not be able to replace those tattered jeans.

The Miscellaneous category is there to cover any expenses that do not fit nicely into any of the other categories. If you find that you have a lot of expenses in this category, you may want to determine where most of that money is being spent and create more categories to cover those expenses separately.

The Savings category is where any unbudgeted money goes. Your goal is to have as much money as possible going into this budget item. If you are allotting so much money in the other categories that this category ends up having a negative cash flow, then you are in trouble. It will only be a matter of time before your lifestyle will become unsustainable due to having no money. If, however, you control your spending on the other budget categories, you should be able to have a positive cash flow in Savings. Then, over time, when you find that you have a significant amount of money in this category, you can transfer the excess to a higher interest rate account such as a savings account, a CD, or another investment. If you are eligible, you might want to invest in some IRAs so you can get a tax deduction. There are many ways to invest, so this topic will be covered separately.

As we said before, there may be some expense categories relevant to your family that we have never considered. If so, add that category to the ones you decided to use from above. Once you have set up all the expense categories that are right for you and your family, it will be time to determine how much of your household income to add to each of them. This can sometimes be difficult, but much of it can be determined by examining past expenses. But before we move on to allocating money, we need to discuss another category: Credit Cards. This is not really an expense category, but it is wise to include it for reasons you will see in the next post.

Income > Outgo

It may seem overly simplistic, but the true essence of a home budget consists of controlling your spending such that it never exceeds the amount of money you have coming in. Take a counter-lesson from the federal government. They, as well as some state and local governments, have been spending more than they take in for many, many years. And just look at the mess it has gotten us into. You don’t want to find yourself in this same mire. You might be saying, “Too late, I’m already deep in debt.” Well, it’s not too late. Most people start out with some level of debt. If you are just out of college and working at your first “real” job, you may have college loans to repay. Also, you probably needed a vehicle to get to and from work and other important destinations such as the grocery store, the doctor, and the gym. Unless you found a good car for a great price, you may owe money on it. And at some point you may have decided to invest in a home, especially with the deflated prices due to the recession. But you may also have found yourself getting caught up in the I-want-it-now craze and went wild with your credit cards. Whatever debts you have incurred, it’s probably time to make a plan to reduce that debt and get your spending on a sustainable path.

One very simple way of handling a budget is to just have a checking account and make sure you don’t spend more than you have in it. Well, that’s a start, but it doesn’t really help you to understand where your money is going each month and to plan for those expenditures that only come around every few months or every year. What is really needed is a way to categorize your expenditures, decide how much money is needed for each category, and then budget accordingly. When you do this, you may see where some expenditures are just not wise given your current income. For instance, you may realize that those car payments are too high or that the cost of gas, insurance, and license fees were more than you anticipated. Under such circumstances, you may decide that you will take on a part time job to earn the additional money needed, or you may decide to sell the car and buy a much cheaper one that is still capable of getting you from point A to point B.

In our next blog post we will present to you some expense categories that we personally use in our home budget and suggest others that may be appropriate for your situation.