[BUSINESS] Making a Budget, Priorities & Goals
- Top Things To Know
1. Budgets are a necessary evil.
They're the only practical way to get a grip on your spending so you
can make sure your money is being used the way you want it to be
2. Creating a budget generally requires three steps.
Identify how you spend money now
Evaluate your current spending and set goals that take into account
your financial objectives
Track your spending to make sure it stays within those guidelines.
3. Use software to save grief.
If you use a personal-finance program such as Quicken or Microsoft
Money, the built-in budget-making tools can create your budget for
4. Don't drive yourself nuts.
One drawback of monitoring your spending by computer is that it
encourages overzealous attention to detail. Once you determine which
categories of spending can and should be cut (or expanded),
concentrate on those categories and worry less about other aspects of
5. Watch out for cash leakage.
If withdrawals from the ATM machine evaporate from your pocket
without apparent explanation, it's time to keep better records. In
general, if you find yourself returning to the ATM more than once a
week or so, you need to examine where that cash is going.
6. Spending beyond your limits is dangerous.
But if you do, you've got plenty of company. Government figures show
that many households with total income of $50,000 or less are
spending more than they bring in. This doesn't make you an automatic
candidate for bankruptcy -- but it's definitely a sign you need to
make some serious spending cuts.
7. Beware of luxuries dressed up as necessities.
If your income doesn't cover your costs, then some of your spending
is probably for luxuries -- even if you've been considering them to
be filling a real need.
8. Tithe yourself.
Aim to spend no more than 90 percent of your income. That way, you'll
have the other 10 percent left to save for your big-picture items.
9. Don't count on windfalls.
When projecting the amount of money you can live on, don't include
dollars that you can't be sure you'll receive, such as year-end
bonuses, tax refunds, or investment gains.
10. Beware of spending creep.
As your annual income climbs from raises, promotions, and smart
investing, don't start spending for luxuries until you're sure that
you're staying ahead of inflation. It's better to use those income
increases as an excuse to save more.
Top things to know
1. Narrow your objectives.
You probably won't be able to achieve every financial goal you've
ever dreamed of. So identify your goals clearly and decide which are
most important, and why they matter to you. By concentrating your
efforts, you have a better chance of achieving what matters most.
2. Focus first on the goals that matter.
To accomplish primary goals, you will often need to put equally
desirable but less important ones on a back burner.
3. Be prepared for conflicts.
Even worthy goals often conflict with one another. When faced with
such a conflict, you can sometimes choose by applying criteria like:
Will one of the conflicting goals benefit more people than the other?
Which goal will cause the greater harm if it is deferred?
4. Put time on your side.
The most important ally you have in reaching your goals is time.
Money stashed in savings accounts or invested in stocks and bonds
will grow and compound. The more time you have, the more chance you
have of success. Your age is a big factor -- younger people (who have
more time to build their nest egg) can act differently than older
5. Choose carefully.
In drawing up your list of goals, you should look for things that
will help you feel financially secure, happy or fulfilled. Some of
the items that wind up on such lists include building an emergency
fund, getting out of debt, and paying the kids' tuition. Once you
have your list together, you need to rank the items in order of
importance (if you have trouble doing so, use the CNN/Money
Prioritizer for help).
6. Include family members.
If you have a spouse or significant other, make sure he or she is
part of the goal-setting process. Children, too, should have some say
in goals that affect them.
7. Start now.
The longer you wait to identify and begin working toward your goals,
the more difficulty you'll have reaching them.
8. Sweat the big stuff.
Once you have prioritized your list of goals, keep your spending on
course. Whenever you make a large payment for anything ask
yourself: "Is this taking me nearer to my primary goals -- or leading
me further away from them?" If a big expense doesn't get you closer
to your goals, try to defer or reduce it.
9. Don't sweat the small stuff.
Although this lesson encourages you to focus on big-ticket, long-
range plans, most of life is lived in the here-and-now and most of
what you spend will continue to be for daily expenses -- including
many that are simply for fun. That's okay -- so long as your long-
range needs are also provided for.
10. Be prepared for change.
Your needs and desires invariably change as you age, so you should
probably reexamine your priorities at least every five years.
You probably won't achieve every financial goal. But you can go
farther than you think.
What are your top three financial objectives?
Most people, when asked that question, answer with general goals,
such as achieving financial security.
The fact is, many of us have never thought much about which financial
objectives really matter most. Instead, we muddle through our
financial lives, spending to meet the day-to-day expenses that always
clamor for attention.
There's nothing terribly wrong with that approach -- except that it
risks leaving the most important objectives unfulfilled.
That's what this lesson is all about: helping you identify the
financial goals that matter most to you so that you can make sure
That's not as easy as it sounds, since financial goals continually
collide with one another. Paying for a child's braces may rob money
that would otherwise go into his college fund, for example. And
saving effectively for your kids' college can wipe out any hope of
putting aside adequate money for your own retirement.
That's why to get what you want most you must 1) decide which goals
will take priority and 2) work toward the lesser goals only after the
really important ones are well provided for.
Fortunately, you have at least one ally in meeting your long-range
goals: time. That's an advantage because of the power of compounding -
- the fact that even a small amount of money can earn interest, and
that each year that interest gets applied to a growing sum of money.
Suppose, for example, you put aside only the cost of a single candy
bar -- about 65 cents -- each day. Invested in a tax-deferred account
paying 5 percent a year compounded monthly, that string of savings
would grow to $3,073 in just 10 years and to $16,470 in 30 years.
For other examples of the way that money can grow over time, try
CNN/Money's savings calculator.
To put the power of compounding on your side, you have to start
early. Suppose there are two siblings who both invest in Individual
Retirement Accounts earning 8 percent a year.
The sister starts at age 20, and for the next 10 years she stuffs
$3,000 a year into her IRA. At age 30, though, she stops and never
adds another penny.
Her brother waits until age 30 to get started, but then dutifully
salts away $3,000 a year for the rest of his life. Which sibling do
you think will be better off?
In this case, the early bird will always be ahead. The sister reaches
age 65 with over $642,000, while her brother will have a little under
$518,000 -- about 20 percent less.
Of course, it's far better, to start early AND keep it up. If both
siblings started saving $3,000 a year in an IRA at 20, and kept it up
until retirement, each would end up with nearly $1.2 million.
The point is that to put time on your side, you need to decide early
which of the many possible financial goals are really worth pursuing -
- and start working toward them.
To get started, make a list of all the things that you'd need to feel
secure, happy or fulfilled. These can range from the weighty (getting
out of debt) to the luxurious (a Lamborghini). You don't need to
prioritize them yet.
But you should try to get down all of the money-related things that
will really get your motor started. And if you have a spouse or
significant other, it's a good idea to do this exercise together --
assuming you think your relationship can survive it! Here are some of
the less frivolous items that you may want to include among the
Accumulating enough savings to handle an emergency
Buying a house large enough to accommodate you comfortably
Getting out of debt -- and staying out
Ensuring that your parents are comfortable and well taken care of in
their old age
Paying for your children's college education
Amassing enough wealth to retire comfortably
Once you have your list in hand, push on to the next section where
you'll determine which of these goals are most important to you.