Personal Finance - The Basics

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Personal Finance - Creating a Budget:


Budget Form

Wouldn't it be nice to have complete control over the money that you earn? Any idea how to accomplish that? Well don't worry you have come to the right place.

This series on personal finance is designed to help you not only understand but master what the word "finances" means but it will assist you in figuring our your financial options, show you how to manage your financial resources effectively, and come up with a long term plan that will allow you to live comfortably no matter your income level.

While most people are frightened at the thought of trying understand what finance is all about but if you take it one step at a time, you can actually successfully master the discipline and understand how to make it work to your advantage.

An Example Budget

 By starting at the very beginning, we can take a step back and see how even the simplest thing can have a dramatic impact on your personal finances. Most normal people go to work every day, get paycheck weekly, biweekly or monthly for about the same amount each time. So to make this example real world, we are going to take a look at a normal everyday person named Mark, a 32 year old software engineer that has been out of the university for about 4 years. Mark gets paid about $3500 monthly or $44,000 on an annual basis. When you factor in the taxes that are taken out before Mark even sees one red cent of his paycheck, his monthly pay gets reduced by about 36.65% which is attributed to federal, state, and FICA taxes. What this means is that Mark is now limited to $1905 of disposable income:

  • $3,500 gross income
  • - $805 federal tax
  • - $187.25 state tax of 5.35%
  • - $267.75 FICA & Medicare of 7.65
  • $1,905 Mark's Net Pay

Naturally the actual amounts subtracted will depend on whether Mark's married (whether or not is wife works, if he is a homeowner, etc.

Because Mark is a good looking single guy he has some reasonable expenses and they are fairly typical for the average single person and they look something like:

  • Rent/Mortgage: $700
  • Car-payment: $400
  • Car expenses (gas, insurance, repairs, etc.): $200
  • Power: $60
  • Cable & Internet $70
  • Cell Phone: $55
  • Food & grocery: $120
  • Dining out, entertainment, stuff.: $300

Folks, this is what we call a very simple budget. It gives you a look into your monthly expenditures and when compared with your take home pay, can be an eye opener.

Mark's total monthly expenditures equal approximately $1,905 per month which exactly matches his income. While this is certainly promising for Mark, it is not realistic because rarely do expenses match personal income exactly and you can always count on two other things; problem and desires...

Unexpected Expenses

See one day when not paying attention to the street signs, Mark ends up with a speeding ticket which cost $170 and then his insurance increases over $40 monthly or his car needs a water pump at the cost of $350. Or maybe Mark meets a "lady interest" and he wants to take her out 15 times in a month which triple his fun money expense. Or worse, he loses his job because he was late due to car problems and he could get it fixed cause he spent too much on his new "special friend".

Then the there is always the desire part, this is something everyone suffers from. You want a new flat screen TV, new clothes, a nice romatnic present for the "lady interest". Sometimes desires are hard to control and before he knows it, Mark has a new TV with surround sound and he has a new monthly debt that needs to be serviced. What happens is that most often, debt is the big difference between actual income and actual expenses. For most folks everyday debt ends up on the credit card, and big ticket items like houses, cars, etc are financed via secured loans. While some debt is not bad.; when it accumulaes for no particular reason and you don't know where it came from. In Mark's situation, his montly balances in credit cards go up each month because there is nowhere else for him to get the money. Any expense out of the ordinary, go on the credit-card and that is how the balances get out of control.

Now the most troubling part about what Mark does not have in his current scenario is that there is no allowance for "savings". No retirement, no IRA, no 401K, and quite honestly, and esentially zero hope of acheiving financial goals (actually,there are no particular goals to start with). Lets get down to where the rubber meets the road here folks: for any reasonable person, it is not comfortable with going through life with absolutely no savings and credit card balances rising out of control. It feels awful because you know it is a recipe for disaster and only a matter of time before the preverbial house of cards comes tumbling down. It eliminates your sense of being in control, and most people want to be in control of both their lives and finances. It doesn't get any simpler than that. There is absolutely no future here and it is only a matter of time before Mark can't keep up.

Let's say that by some stroke of luck Mark doubled his salary via a new job. Would that not be great? Certainly it would except that 95% of us (including Mark) would be suseptible an unrelenting urge to increase his expenses by almost double as a result. Actually, if 100 people were told that their monthy salary will double six months from now, about 95 would start doubling their monthly expenditures almost immediately, before they even received the actual cash in-flow. What they would do is to move into a nicer residence, obtain a better car, buy new furniture, and so much more until they end up in exactly the same situation again. You know the one, where their expenditures exceed their income. That is why making more money is not the answer and will not solve problems because most people have a tendency to spend what they make in the same manner that we always eat all the food on the plate fill up our closet because we have the room. It is completely normal. The majority of the people live their lives in just this manner. Truthfully it is really scary and there is only one way to stop-the-insanity.

You Must Stick to your Budget

It requires that you undertake a monstrous mental shift in perception. If you're willing to make change (ie. the mental shift), then you can solve the problem. The key is that there is a dramatically different approach to living life. It involves separating wants and need and by determining exactly what you really want as compared to what is important, and then applying a laser focus towards acheiving your goals rather than wandering thru your financial life aimlessly. What you gain by adopting the process is a keen sense of being in control and the resulting satisfaction. And when you start to achieve your goals and see your plans come thru to fruition, that is a feeling that is hard to beat.

Stay tuned for the next article in this series that gives you the steps to start proceeding down the path to financial freedom! In the meantime, develop a workable monthly budget and stick to it.

Mortgage and Credit Debt Services
Q What should I do if I am deep in debt?
A Whether it is caused by illness, the loss of your job, or simply just over-spending, a financial crisis of this sort can seem overwhelming, but it often can be overcome. Don't let your financial situation go from bad to worse.

Realistic budgeting, credit counseling from a good organization, debt consolidation, or bankruptcy, are some of your options. Knowing which one will work best for you depends on how high your debt is, if you can discipline yourself, and your prospects for the future.