New Jersey Bankruptcy Articles
Creating a “Spending Plan” – The Critical First Step
By Steven R. Neuner
As we keep telling our clients, the first step to getting your life in control is to see where you are and where you are going. This requires something most people like to avoid, creating a “spending plan”, or what some people call a budget.
Even if you know you are in trouble, a budget can help you find out why, and to pinpoint where the problems are. And a budget is absolutely critical before making any new purchase that requires new borrowing. People used to think that if they qualified for a new loan they could afford it. Today, we know that is not true. And today, you are going to have to know what you have to spend to get any kind of loan at any kind of reasonable rates.
So what is a “spending plan”? It is a commitment to track your spending and keep it within the limits of what money you have available. Even if, like most of our clients, the income does not meet the monthly spending needs, it helps you work toward the “balanced budget” which is essential for financial survival.
To make this as effective and painless, we offer the following guide. And if you have Microsoft Excel, you can use our household budget spreadsheet, or download the personal budget forms we supply.
First Set Priorities and Goals.
Ask yourself: If I have to cut back, or give up something I cannot afford, what is most important for me to keep? This may require you to think of the various “worst case”outcomes that could play out if your financial problems do not change for the better fast enough or if you make the wrong decisions..
We think the most important concern is to preserve your ability to earn or keep receiving income. Without income, homelessness could be the result, and that, we think is positively the worst possible outcome.. And for most people, this means access to reliable transportation. So a car may be high on the list of important things to have or keep. Maybe only one is needed. Or maybe moving close to good public transportation.
Equally important is to preserve and protect the ability to have a secure place to live, food on the table, and basic utilities.
Notice that while quite important, saving an existing home may not be as important, especially if you cannot afford the combined cost of taxes, mortgage payments etc, and could move to a less affordable place to rent at some point in the future. We do not minimize the value of owning a home, especially in our current environment.
Still, keeping up mortgage payments is not right for everyone, especially if sacrificing more important goals could be the result. Indeed, in some cases, the substantial savings in “cost free” housing during the time it takes for a home to be sold at foreclosure (as long as 12-18 months in some cases) can afford you an ability to spend limited income on more important goals, and to put aside money for moving or as a “rainy day fund” for future critical needs. Note: this “strategy” needs to be carefully considered and understood, but is often quite effective in helping families turn things around. Call us to discuss this.
We urge you to think this through for yourself, and put together a basic written plan, and a budget. We can help you carefully consider all your options, and to map out a strategy that works for you. Call us at (856) 596-2828 or email us at email@example.com for a free initial consultation.
Putting together the Budget
First, calculate your current income from all sources. Remember that there are 4 and one-third weeks in a month. Be realistic. Use an income figure that is conservative and reliable, not inflated on what you hope might happen.
Next, calculate your expenses. Don’t be put off by the uncertainty here. Most people do not know what they really spend. But start with your best guess. To help, we suggest:
1. Look at your checkbook, or bank and charge statements.
2. Use annual or other periods if helpful. Most people can guess what they spend a year on clothing, auto repairs or auto insutance. Divide this by 12 and you have a good monthly figure.
3. Start tracking your actual spending. This can be done using either a “low tech” or “high tech” approach.
The Low Tech Approach: save your grocery bills, and other receipts in an envelope, marked with the start date or month. At the end of a set period, say 2 weeks, add them all up by category, eg household and food items. See what is actually spent. You can use a handwritten list, a notebook etc. Tie your totals to the budget categories. Give each adult family member a weekly “allowance” in cash for small items. Look at your previous charge bills and bank statements, and total up monthly purchases by categories.
The High Tech Approach: Use a spreadsheet program, or personal-finance software like Microsoft Money or Intuit’s Quicken, or free, online services. Make sure to have a category for “cash” for the small purchases. While budgeting software can take a couple of hours to set up, the time savings in the future will more than make up for it. Or use debit cards, and checks for all your spending, then track and categorize everything with software. Again, list all cash spent—road tolls, the barber’s tip, for instance—as “cash.” To update regularly, you may need to establish Web access to your accounts.
Make your spending categories meaningful. Whichever approach you take, don’t make spending categories too narrow or too broad.. Vet visits, dog food, and grooming can all fit under “pets.” But two big items like groceries and restaurant meals should not be lumped together under “food.” And don’t underestimate the periodic expenses, like tires for cars (usually replaced after 40,000 miles). See our budget spreadsheet which helps you calculate a monthly allowance.
4. Think of ways to save. Pack a lunch. Make your own coffee. In stores, look for value and discounts, esp in the grocery store. Use coupons.
5. Make a floating list of things you don’t need, or substitutes. Again, just start, and feel free to add or subtract from the list. Here is an example:
What I buy now + cost Cheaper Alternative Savings
Premium Cable: $130/month Basic Cable: $60/month $70/month
Buying lunch at work: $10/day Pack a lunch: $3/day $35/week. $152/mo
6. Plan for Surprises.
Key budget busters for many families are unexpected bills, such as emergency dental work or the car repair that costs hundreds of dollars. Review your bank and credit-card records from the past year and tally all those expenses you had. Add 10 percent for inflation. Divide that figure by 12 for the monthly total, and give it its own category, “unexpected.”
Don’t forget to include your holiday and family celebration spending. Divide the amount you expect to spend by 10 and set that amount aside each month. Then you’ll have the cash for shopping by November.
7. Make the situation an opportunity to educate your children and bring them on board as a team.
Many parents, out of worry, shame or other motives, don’t let their kids in on the process. Children, however, quickly sense or figure out something is wrong. Depending on their age and maturity, this might be something to avoid, especially for children over the age of 10. Having seen our share of young adults who make reckless spending decisions, we wonder how many could have benefitted from some frank talk about solving financial problems. Maybe a long talk with your children about how they are going to be part of the team that helps the family get past your current difficulties would be good. A positive and cooperative approach, with each child given a role to play could well relieve you of pressure and family conflict no one needs at a time like this. And at birthdays and holidays, they will better understand why the presents are not as flashy or expensive. Most importantly, this is a great opportunity for children to learn about money management, and making choices based on “needs not wants”.
8. UPDATE REGULARLY. Your Spending Plan is a work in progress, for the rest of your life. Any plan is better than none at all. But make corrections whenever and whereever they are needed.Every few months, reevaluate your plan and make appropriate changes. At the very least, sticking to a spending plan will make you aware of where your money is going. And in all likelihood, you’ll soon find yourself closer to where you want to be.
We hope this guide is helpful. We can help you consider the legal alternatives, including bankruptcy. We do not sell bankruptcy. Instead, we want to be part of your solution, not part of your problem. Call us for a free consultation, at (856) 596-2828. We will take the time to talk over with you all your options and to help you with the planning process that will help you take control of your life. When you leave our offices, you will either have a plan or be ready to act and plan your future.
Here is our budget form (Microsoft Excel required)
Here is another form for use with our bankruptcy questionnaire