Creating a Budget -- Step 4: Trimming the Fat

Previous Topic: Step 2: Tracking Your Income / Step 3: Comparing Income:Expenses

So far we have tracked expenses and income, as well as compared the two amounts to reveal if there is left over monies or if you need to cut back on your spending. The next step will look back at your expenses that you tracked in Step 1: Tracking Your Expenses (Part I) and (Part II) and see where you can trim excess spending.

Step 4: Trimming the Fat
This step involves really looking at the way you spend your money and assessing areas in which you could cut back. Whether or not Step 3 revealed a positive or negative amount, it is suggested to still review your past spending, you may end up with an even large amount of money left over at the end of the month which you can use towards reaching your life goals faster.

Trimming the fat comes before actually assigning amounts to different budget categories. Take this time to reflect on how youʻve been spending your money and think about your financial goals and what it will take to help you achieve those goals. If your goal is to have more money at the end of the month, instead of living paycheck to paycheck; then passing up on that weekly shopping spree might be a good place to start. To begin this reflection and assessment process letʻs start with needs vs wants.

Needs vs Wants

In this step is where distinguishing between Needs and Wants is important. Good money management involves having enough money to cover all your "needs," while purchasing "wants" only when you have extra money to do so. Let me first define these two concepts.

Needs - something you must have for survival -- something that you canʻt live without. Food, shelter, and clothing are examples of needs.

Wants - something you would like to have -- something not absolutely necessary for your survival, but that you would enjoy having. Examples of wants include iPods, designer clothes, vacations, Xboxes, or Rolex watches.

Variable Expenses
It is within your spending on your variable expenses, where your needs and wants will help to determine where you can cut some of your spending. You were asked in Part II of Step 1 to notate a N for Need and a W for Want. Begin with the category of your variable expenses that has the most Wʻs.

Letʻs take a look at our example:

The most Wʻs are found in the Entertainment Category. This is typically where families can cut costs. This family, spent $144.17 on entertainment in one month. With the rising cost of watching movies at a theatre it is very common for families to spend much more than amount this on entertainment. An alternative to spending large amounts on entertainment is to find fun and engaging activities to do with the family that are FREE. For example, going to the beach, borrowing a movie from the library or a friend to watch at home, or spending family time at the park.

You donʻt have to eliminate Entertainment, but in the next step we will assign amounts to the categories. For now, you can think about what a reasonable amount to spend on entertainment for your family would be.

The next category to look at from our example would be the Clothing Category. 

This is another category where families can often cut costs. Think back to what you needed the clothing for. Was it for work, for a party, just because you thought it was cute? Think about ways you can save money on clothing for your family. Accepting hand me downs for your kids, shopping at a thrift shop or discount store, or looking through the Sale and Clearance Rack for good bargains are great ways to cut back on clothing costs.

Again, you donʻt have to eliminate this category from your spending. Just remember to be mindful of the amounts that you are spending

Lastly, we will take a look at the Dining Out category.

I noted these transactions as both Need and Want. Many will argue that you NEED to eat, but is it necessary to eat out excessively when you could prepare a meal for a lot less at home (not to mention it would probably be a healthier option to cook)? Itʻs perfectly fine to enjoy a meal out from time to time. But if you find yourself drowning in bills and not being able to pay on time then think twice about dining out.

For busy families, dining out is a part of the routine. Just be mindful of your selection of eateries and eat at places that give you the most bang for your back.

Fixed and Fixed-Variable Expenses
Excess spending can also be found in your fixed and fixed-variable expenses. For example, when was the last time you evaluated your Auto Insurance Policy. Do you still need the same amounts of coverage? Are you taking advantage of all the discounts that your insurance provider offers? Have you shopped around for a policy through a different provider?

Your electric bill is also a place where families can save a buck or two. Hawaii Energy is a great resource to find ways on how to save money on your electric bill.


Take your time as your go through your transactions that you have tracked. A good question to ask yourself when purchasing something that is a want is, "What else could this money be used for?" This will help you determined if you still really WANT to make that purchase.

After looking at the way you spend you money you may be feeling a bit overwhelmed, or even defeated. Donʻt let it get you down, acknowledging the way you negatively spend money and making a commitment to change your spending behavior to be positive, is a giant step in the right direction.

Next Blog Topic: Step 5: Defining Budget Accounts

Creating a Budget -- Step 2: Tracking Your Income / Step 3: Comparing Income:Expenses

Previous Topic: Creating a Budget -- Step 1: Tracking Your Spending (Part II) 

Now that youʻve had the opportunity to look at how you spend your money. Weʻre going to explore where that money comes from and whatʻs your bottom line. You probably already know whether or not you have any money left at the end of the month. However, these next two steps will reveal exactly how much you have left. You will also discover if you need to cut back on your spending or if you have any monies left over that could be used to pay off debt faster, put into a Savings or to Invest

Step 2: Tracking Your Income
List how much money you take in each month from all sources. This includes but is not limited to the following:

-  Wages from work (even under the table income)
-  TANF (Temporary Assistance for Needy Families) also known as Welfare Cash Benefits
-  SNAP (Supplemental Nutrition Assistance Program) also known as Food Stamps or EBT
-  Section 8 Voucher
-  Income from Network Marketing Company (i.e. Avon, Thirty-One, Visalus, etc.)
-  Self- Employment Income
-  Social Security Payments
-  Disability Income
-  Settlement Payments
-  Unemployment Benefits
-  Lottery Winnings
-  Any money someone gives you on a regular basis (i.e. gas money for car pooling, if you have someone on your cell phone plan and they pay you cash to cover their portion of the bill)
- Any other source of income

List both Gross Income and Net Income amounts for each source of income. This step may be very easy for some who work one job and that is their only source of income. However, it is very common that many families supplement their wages with other income. Below is an example of what tracking your income may look like.

Hopefully the total net amount of your income from all sources is higher than your total expenses that you tracked in Step 1. The next step in creating a budget is to reconcile the differences in these amounts to reveal if you have enough money to meet the basics: housing, food, health care, and insurance. 

Step 3: Comparing Income:Expenses

1. Total your Expenses from Step 1, including Fixed, Fixed-Variable and Variable Expenses.
2. Subtract your total expenses from your total net income from Step 2.

If this number is positive, then you are doing a great job. Keep it up. You may want to consider investing that extra money or putting it into a savings product. Or if you have debt, use this extra money to pay down that debt.

If this number is negative, then the next step in creating a budget will be very important for you. In this step you will analyze your spending and trim the fat. Chances are if you are in the negative that you are resorting to the use of Credit Cards to pay your bills or expenses, incurring overdraft charges on your account, having to borrow money from others, or worst yet missing payments on your bills.

Below is what comparing your income to expenses may look like, from the examples that have been shared in Step 1 and Step 2.

From this example, you can quickly tell that this family needs to trim some fat. If this is the case for you, donʻt worry. This is why you are taking the time to gain control of your finances. This is also the time to start thinking about how you spend your money. The next step will help you see where you will reduce spending so that you can make this Bottom Line Total. 

Next Blog Topic: Step 4: Trimming the Fat

Creating a Budget -Step 1:Track Your Spending (Part II)

Previous Topic: Creating a Budget - Step 1: Track Your Spending (Part I)

Hopefully you found Step 1: Track Your Spending (Part I) easy to complete. Fixed and Fixed-Variable Expenses are typically the easiest to track because you get bills reminding you that you owe money to someone and there is normally a due date attached to those bills. Yes, Iʻm talking about those ones that come in the mail and you put them on the side without opening them, secretly wishing that they would magically disappear. On the other hand, if you have auto payments, then you might not have been aware of the exact amounts that you spend on these expenses every month. Hopefully, this exercise helped you be more mindful of this type of expenses.

The next part of Step One is to track your variable expenses. These are probably the most difficult to track because most of these expenses are made unconsciously with a swipe or handing over a $20 bill. These expenses add up very quickly and this is where most people donʻt realize how much they are spending on something like a daily cup of coffee, until you add up your spending over a period of time.

Step 1: Track Your Spending (Part (II)

3. Variable Expenses 
Variable expenses is everything else that you spend your money on. Again, this is probably the hardest to track. Here are a few ways to track variable expenses, select the one that is easiest for you:

Method: Bank Statement
If you are a swiper, meaning you mostly use your debit card to pay for things. This is the easiest way to track your variable spending. Get a copy of your bank statement for the last full month. For example, it is April 5th, so you would look at March's bank statement. Go through transaction by transaction and categorize your spending into like categories (Gas, Groceries*, Dining Out, Entertainment, Clothing, Etc.) Total your spending for each category.

Method: Receipts
If you use cash or a mixture of cash and debit card, and you keep your receipts. Then gather your receipts for the last full month. Go through each receipt and categorize your spending into like categories (Gas, Groceries*, Dining Out, Entertainment, Clothing, Etc.) Total your spending for each category.

Method: Journaling 
If you are not able to use bank statements or receipts to track your spending. Take the next month to journal how much you spend. There are smart phone apps to track your spending that will even allow you to select a spending category and will report the totals for each category. You can also just take a small notebook with you and log every transaction you make. This method takes a little more time than the others. But creating a budget is a process.

You can either hand write these amounts, but I find using an excel spreadsheet is easiest because it will do the calculations for you. If you donʻt have every transaction you made in the prior month, donʻt sweat it. Get as many as you can. The more you have, the more accurate picture you have our your spending habits.

Keep in mind as you go through your bank statement, receipts or as you journal look at what you are spending your money on. Is it a NEED or is it a WANT? You can also notate next to each transaction a (N) or a (W). All the W's is where you can trim your spending to be able to stay on budget. This will be discussed in a later step of Creating a Budget. 

Here is what tracking your Variable Expenses might look like:

Once this step is complete, you will be able to move on to
Step 2: Tracking your Income & Step 3: Comparing Income:Expenses

Note* If you receive SNAP Benefits (aka EBT or Food Stamps) be sure to still include the amount you spend on food in your tracking.

Creating a Budget -- Step 1: Track Your Spending (Part I)

As promised, I am giving you simple steps to creating your budget over the next few days. Creating a budget is a process. I will present this information by breaking down the entire process into manageble tasks.

I hope many of you will consider creating a budget and that you find these steps easy to complete. At any time you have questions or need assistance, please feel free to contact me at saydeepojas@gmail.com.

Today's topic will get you started on tracking your spending and begin evaluating how you've been handling your money.

Step 1: Track Your Spending (PART I)
Everyone has a limited amount of money available to spend. To be able to manage this money is important for financial success. There are different types of expenses to track Fixed, Fixed-Variable, and Variable.

1. Fixed Expenses - Start a list of the bills and their amounts that you pay the same exact amount every month. These expenses include but are not limited to the following:
     Rent/Mortgage
     Car Payment
     Insurance (Auto, Home, Life, etc)
     Credit Card






In addition, add to this list the bills that you pay on an Annual basis (or every 6 months). Divide the amount you owe by 12 to split the amounts evenly over the year. These fixed annual expense include but are not limited to the following:
     Car Registration
     Gym Membership

2. Fixed-Variable Expenses - The next bills to track are bills that you pay monthly, but the amounts vary from month to month. To figure out the amount, look at the amounts you've paid for these bills over the past 3-6 months and write down the average amount that you paid. These fixed-variable expenses include but are not limited to the following:
     Cell Phone
     Electric
     Water
     Credit Card (if you minimum monthly payments vary month to month)

You can hand write these amounts, but I find using an excel spreadsheet is easiest because it will do the calculations for you. Below is an example of what your spreadsheet may look like after tracking these two types of expenses.

Next Blog Topic: Step 2: Track Your Spending (PART II)

The "B" Word -- Budget

BUDGET!
Yes, the dreaded "B" word. Often times when people hear the word "Budget" they think of being cheap, pinching pennies, or being the other "B" word -- Broke. Many people do not like to budget their money, because they feel restricted, they feel deprived or even feel poor.

If you think about it, the most successful businesses wouldn't be successful if they didn't follow a budget. So why not apply the practice of creating and following a budget to your personal life? A Budget is simply a plan for how to handle your money, a road map to give you the money you need to live the lifestyle you want. (Real Money Experience, NFEC).

There are also many benefits to budgeting, which includes being in Control of your money and being in the financial driver's seat. Budgeting also keeps you Organized, having a financial plan helps you to stay in control and also helps to not miss out on important payment deadlines or over drafting your checking account. Believe it or not, working within a budget can leave you with More Money every month. Lastly, sticking with your budget will open up many financial windows of Opportunity. I don't know about you, being in control and organized helps me to be less stressed, and more money and opportunity, sure I'll take some!



So how do you make a budget? Because creating a budget can seem intimidating I will spend the next few days giving simple steps on how to get started with a budget. Keep in mind creating a budget is a process. Take it step by step. A small investment of your time will return you great rewards.

Note* If you are married or share expenses with a significant other, it is VERY important that both of you are on board to create a budget.

Tomorrow's Blog Topic: Step1: Track Your Spending

What income category are you in?

The Wai'anae Coast is often considered a high poverty area. The terms poverty and low-income are often attached to the residents along the coast. What actually constitutes poverty? How little do you have to make in order to be considered low-income?

Hopefully this will help others understand the different income categories. To know if you qualify or do not qualify for different services, it is important to know what income category you and your family are in.

Below is the current 2013 Federal Poverty Guidelines for Hawaii
(As of January 24, 2013):

Add $4,620 for each additional person

In Hawaii, the average person per household is 2.93. We will round up and look at the family size of 3 to illustrate an example.

Extreme Poverty is defined as 50% of the Poverty Level. Therefore, from the chart above a family of 3 would have to make $11,235 per year to be considered in extreme poverty. This translates to a family that receives $936.25 per month before taxes.

Poverty is defined at 100% of the Poverty Level. Therefore, from the chart above a family of 3 would have to make $22,470 per year to be considered in poverty. This translates to a family that makes $1872.50 per month before taxes.

Low-Income is defined at 200% of the Poverty Level. Therefore, from the chart above a family of 3 would have to make $44,490 per year to be considered in poverty. This translates to a family that makes $3745 per month before taxes.

To put things in to perspective, according to current Census information, the median household income for the State of Hawaii is $67,116.00

So where does your family fall in all of this?

1. Calculate your annual income before taxes
2. Compare your income amounts to that of the chart above

Please keep in mind that these are income levels categorized by the Federal Government. These guidelines will determine eligibilty for services such as WIC, SNAP (foodstamps), TANF (welfare), MedQuest, etc.

Although, my purpose of sharing Financial Literacy is to help families rise out of poverty. However, there are times where accessing services will allow you to use your other income to pay off debt, save for a home and through time be able to rise out of poverty. These families will then no longer qualify for these services and benefits, however my hope is to equip families with the knowledge and skills to be able to sustain themselves without those services.

For help calculating your Family's Income please feel free to email me at saydeepojas@gmail.com. 

Happy National Financial Literacy Month

April 1st marks the beginning of National Financial Literacy Month.
In 2004, the U.S. Senate passed Resolution 316 that officially recognizes the month of April as National Financial Literacy Month. Hawaii's own Senator Daniel Akaka was one of the 22 Senators that sponsored the measure to highlight the need to promote financial literacy in our homes, schools, workplaces, and communities.

In 2011, Senator Akaka was quoted in Hawaii 24/7 saying “Increased financial literacy provides people with the tools they need to make responsible decisions for themselves and their families. Many individuals are struggling to understand our increasingly complex economic system."

In recognition of National Financial Literacy Month, I will be posting daily blog posts in regards to Financial Literacy.