The Way to Stay Out of Debt
IN THESE changing times, managing family resources can be a challenge. How can you meet the challenge successfully?
The answer is not necessarily more income. Financial experts say that the answer has to do with having a sense of where the money is coming from and where it is going as well as with being willing to make informed decisions. To do this, you need a budget.
Overcoming Resistance to a Budget
Budgets, however, “conjure up all sorts of images of dreariness,” says financial adviser, Grace Weinstein. So, many people simply will not make one. Some also associate the need for a budget with a low income or a lack of education. But even professionals with high incomes have money problems. A financial counselor says: “One of my first clients made $187,000 a year . . . Their credit card debt alone was just under $95,000.”
Michael, mentioned previously, was reluctant to seek financial advice for another reason. He admits: “I was afraid that others would view me as naive and foolish.” But such fear is unfounded. Managing money and making money call for different skills, and most people are not trained to manage money. A social worker points out: “We graduate from high school knowing more about an isosceles triangle than how to save money.”
Budgeting, though, is relatively easy to learn. It involves making a list of income and a list of expenses—and then keeping the expenses within the income. Actually, making up a budget can be enjoyable, and living by it can be satisfying.
Let us start by making a list of income. For most of us, this should be easy because it generally involves only a few items—salary, interest from a savings account, and so forth.
But do not count on income that is uncertain, such as that from overtime pay, bonuses, or gifts. Financial consultants warn that planning on uncertain sources of income can get you into debt. If such revenues do materialize, you may choose to use the money to treat yourself and the family, to help others in need, or to contribute to a worthy cause.
Making a list of expenses, however, can be a bit more tricky. Robert and Rhonda, mentioned in the previous articles, could not understand where their hard-earned money was going. Robert explains how they solved the problem: “For one month we each carried a piece of paper and wrote down every single penny we spent. We even wrote down the money spent on a cup of coffee. And at the end of each day, we entered the amounts in the budget book I had purchased.”
Conscientiously recording everything you spend will help you locate any ‘mystery money’ that seems to slip away. If you know your spending habits, however, you may decide to bypass keeping a detailed itemization of what you spend each day and go ahead with a list of monthly expenditures.
Listing Monthly Expenses
You may want to work up a chart similar to the one shown above. In the “Actual Spending” column, enter the amount you currently spend for each item. Limit the number of main categories, using headings such as “food,” “housing,” and “clothing.” However, do not omit pertinent subcategories. For Robert and Rhonda, a large part of their money was going toward eating out, so separating “eating out” from “groceries” proved helpful. If you enjoy extending hospitality to others, this too can be a subcategory under “food.” The idea is to make the chart reflect your individuality and preferences.
When working up your chart, do not forget quarterly, semiannual, annual, and other periodic expenses, such as payments for insurance and taxes. To include them in the monthly chart, though, you will have to divide the amount by the appropriate number of months.
An important item in a list of expenses is “savings.” While many may not think of savings as an expense, you will wisely budget some of your monthly income for emergencies or special purposes. Grace Weinstein emphasizes the importance of including savings in your list of expenses: “If you can’t manage to save at least 5 percent of your after-tax income (and that’s a bare minimum), you’ll have to take harsher measures. Cut out your use of credit, rearrange your style of living, and get down to basics.” Yes, make a point to include savings in your monthly budget.
For a cushion during a period of possible unemployment, it is now commonly recommended that you try to establish readily available savings of at least six months’ earnings. “If you get a raise,” says a fiscal adviser, “save half of it.” Do you feel that it is impossible for you to save?
Consider Laxmi Bai, who like many in rural India is very poor. She started to put away in an earthen pot a handful of rice from the daily portion she cooked for her family. Periodically, she would sell the rice and deposit the money in the bank. This was a step toward getting a bank loan to help her son set up a bicycle-repair shop. Such small savings have made big differences in the lives of many, reports India Today. This has made economic independence a reality for some.
However, balancing a budget is more than making a list of income and expenses. It involves keeping expenses within income, which may call for cutting back on your spending.
Is It Essential?
Notice the heading “Essential?” on the form on page 9. This column is vital to consider, especially if you find that the total in the “Amount Budgeted” column is greater than your income. However, deciding whether an item is essential and how much money to allow for it can be a challenge. Especially is this so in these changing times when we are bombarded with a continual supply of new products that are advertised as needs. Thinking of each expense in terms of definite need, questionable need, or nice-to-have luxury will help.
Look at each expense that you have listed, and after thoughtful evaluation, enter “Y” in your “Essential?” column if the item is a definite essential; “?” if it is a questionable need; and “N” if it is a nice-to-have luxury. Remember, the total listed in the “Amount Budgeted” column cannot be greater than your monthly income!
The items marked “?” and “N” would obviously be the ones to begin cutting. These expenses may not need to be completely eliminated. The idea is to examine each item to see if the expense is worth the enjoyment that the expense brings and to slash accordingly. Robert and Rhonda saw from their list that they were spending $500 a month on eating out. It was a habit they had fallen into because neither of them knew how to cook. But Rhonda took steps to learn and says: “Now cooking has become enjoyable, and we eat at home more often.” Robert adds: “We now eat out only on special occasions or when it is necessary.”
A change in your circumstances may cause you to make a total reevaluation of what is essential. As mentioned in the first article, Anthony’s income took a nosedive. It went from $48,000 annually to less than $20,000 and stayed at that level for two years. If this should happen to you, you may need to set up a survival budget, paring all fat from your spending.
Anthony did just that. By making serious cuts in money spent on food, clothing, transportation, and recreation, he painfully managed to keep from losing his house.* “As a family we had to determine our real needs and wants,” he says, “and we have benefited from the experience. We now know how to be content with less.”
Cut Back on Debt
Unchecked debt can frustrate your efforts to live within your means. While long-term debt used for financing the purchase of assets such as a home that increases in value can be advantageous, credit-card debts used to finance day-to-day living can prove disastrous. So “don’t pay a penny in card charges,” says Newsweek.
Financial experts encourage paying off credit-card debts even if you have to dip into your savings. It simply does not make sense to carry debts at high interest rates while nurturing savings at low interest rates. Realizing this, Michael and Reena paid off their credit-card debts by cashing in their savings bonds, and they resolved not to get into that situation again.
Robert and Rhonda, not having such resources, went to a survival budget. Robert says: “I made a bar graph on a white board showing how our debt would be decreasing month by month and hung the board in our bedroom where we could see it every morning. This provided a daily incentive.” At the end of the year, how delighted they were to be free of their $6,000 credit-card debt!
In some countries even a mortgage is not as good an investment as it once was. And buying a home can end up costing you plenty in terms of interest charges. What can you do to reduce the cost of a mortgage? “Either put more money down than the bank requires or buy a less expensive house,” recommends Newsweek. “If you already own a house, resist the urge to scale up.”
You can substantially reduce the cost of an auto loan by making a large down payment. But you will have to save for this ahead of time by making an entry for it in your family budget. And how about selecting a good previously owned vehicle?* Its low initial cost may mean lower finance charges. You may even be able to purchase one without having to go into debt for it.
Will You Succeed?
Whether you succeed in making your budget work depends to a large extent on how realistic it is. “The system won’t operate if the amount set aside for the household is so small you can’t possibly get through the month on it,” says one couple who have successfully lived by a budget.
Another very important factor in making a budget work is good communication among family members. Those affected by the budget should have an opportunity to express their viewpoints and feelings without being ridiculed. If family members involved understand the needs and wants of one another and realize what the family’s financial situation really is, there will likely be better cooperation and a better chance that the family budget will succeed.
In these critical times, as the scene of the world keeps changing, pressure on family finances increases. (2 Timothy 3:1; 1 Corinthians 7:31) We need to exercise “practical wisdom” in coping with the challenges of modern life. (Proverbs 2:7) Keeping a budget may be just the thing to help you do that.
[Blurb on page 11]
Examine each item to see if the expense is worth the enjoyment it brings
[Blurb on page 12]
Beware of credit-card interest charges!
[Chart on page 9]
MONTHLY EXPENDITURE AND EVALUATION CHART Month
EXPENSES Actual Spending Essential? Amount Budgeted
Mortgage or rent
TOTAL (compare with income)
Rental property (if any)
Interest on savings
TOTAL (compare with expenses)
[Picture on page 10]
Good family communication is important in making a budget work