Making a realistic budget is a cornerstone to building a good financial foundation for you and your family. It really doesn't have to be too detailed or restrictive, though you do have to make some tough decisions on how you spend your money.
You need to know what your total annual income is, so list your income sources and total them. Generally most of us have a regular paycheck and your pay stubs tell you what your "total to date" income is for the year. Your IRS W-2 forms from the previous year will also give you your gross earnings for one year. Check your income tax filing from the previous year and this should list other sources of income you had for a year, such as interest earned, stock sales, profit or loss from a business, etc.
1. Divide your income sources into two categories -- regular income and variable income. Regular income will list the wages or salaries earned on a regular basis each month. (This is your gross wages or salaries before taxes.) Variable income is basically those items that generate income, but are not consistent in the amounts you earn on a month to month basis, such as money earned from stock sales, real estate sales, part time business, etc.
2. Total all your annual expenses items. Divide your total expenses into two categories: fixed expenses and variable expenses for the year. Fixed expenses are those items which we have to pay every month (even though some of these amounts will vary, such as utilities, they still have to paid every month). Examples of fixed items would be rent or house payment, food, loan payments, transportation cost (especially fuel), monthly parking fees, insurance premiums, federal and state tax withholdings, and utilities, as mentioned earlier.
3. Variable expenses are tough to list. There are so many things we spend money on, on a daily basis, that it is difficult to itemize. Things like food, clothing, lattes, parking fees, smokes (if you smoke), donations for charities, etc. Make this list AFTER you have made your fixed expense list and have a figure for total FIXED income minus fixed expenses. An example might be:
Fixed Income items Annual totals
Wages or salaries $50,000
Less Fixed Expense items -$35,000
Total income remaining for variable expenses and savings $15,000. ($50,000-$35,000)
4. Take your annual figures from steps 1 through 3, above and divide by 12 months. ($50000/12 mos.) This will give you a monthly budget figure for income and expenses. Based on above example, monthly income would be $4167 and monthly expenses would be $2916.
5. Now subtract the monthly income from the monthly expenses. ($4167-$2916 = $1251) This will give you a total of $1251 for discretionary (variable) spending each month.
6. Now you can make a list of variable expenses because you have a total of $1251 available each month. You can go into as much detail or depth as you want at this point. List things you know you will spend the money on like clothing, food, lattes, etc. Or a simplified method is to take the $1251 figure and divide it by 30 days in a month ($41.70) and allow yourself to spend this amount on your many variable expense items.
7. If you are paid monthly, take the $1251 as a cash withdrawal from you check, separate into 30 envelopes and take an envelope with you each working day. If you don't spend anything that day, then you can add to the next day or save it by putting it back in the bank. If paid bi-weekly, then divide $1251 in half ($625.50) and use step 7, only use 15 envelopes. If weekly, then $312.75 and use step 7 envelope (using 7 envelopes) process. This method helps you control your spontaneous purchases, because when the envelope is empty you have spent your daily allowance.
Don't defeat your budget by using a debit or credit card when you run out of cash for the day. (Unless it's an emergency... A nicotine or coffee "fix" does not qualify as an emergency!)
Monday, July 21, 2008
Thursday, January 10, 2008
From the people who gave us the subprime mortgage mess, ADVICE?
The Federal Reserve is under extreme pressure from the wall street wizards to lower the interest rate to 3% or less. The wizards have gotten themselves, the US, and most of the world economies into a sub-prime mortgage meltdown and now they want the Fed to throw them a rope. The rope, lowering interest rates, is tied directly to printing money which exacerbates inflation by pouring more money into an already inflationary economy.
No one wants a recession, but the US has had many recessions over the years and they do have a useful purpose. They tend to wring out economic excesses that build up over time. They use to occur about every three to four years as a part of the normal economic business cycle. We have now gone approximately seven years without out a recession and just like with earthquakes the longer between quakes the stronger the jolt.
Let's not follow the short sighted advice of the Wizards. Let's hold the interest rate steady. Let's not fan the fires of inflation as a temporary solution to the sub-prime mortgage mess.
Thursday, September 20, 2007
What was the Fed thinking?
You wonder what the Fed was thinking with this recent 1/2 point rate reduction. If their primary goal is to control inflation, they must feel it is under control then I guess the powers that be in the Fed have not personally been in a grocery store or bought gas recently.
I know they say we have to exclude "volatile food and energy" sectors from the inflation equation, but that is like not noticing the elephant in your living room. Both food and energy impact inflation pressure and price rises filter through the whole economy. e.g. Food transportation costs rise with gas prices so food price increase. Also, the rest of the world is buying more agricultural products so even with farm production methods improving, the demand is greater than the supply and food prices rise again.
Reducing the discount rate only adds to inflationary pressure and will make the Feds job harder, down the road. Remember the 12 percent plus inflation rates of the '80's? Also, those citizens who depend on money market savings accounts will have their income reduced and spend less, further restricting demand.
Their whole purpose for this reduction is to prop up the financial industry's losses and helping those institutions which caused the mortgage meltdown by providing loans based on thin air to begin with. How sad!
I know they say we have to exclude "volatile food and energy" sectors from the inflation equation, but that is like not noticing the elephant in your living room. Both food and energy impact inflation pressure and price rises filter through the whole economy. e.g. Food transportation costs rise with gas prices so food price increase. Also, the rest of the world is buying more agricultural products so even with farm production methods improving, the demand is greater than the supply and food prices rise again.
Reducing the discount rate only adds to inflationary pressure and will make the Feds job harder, down the road. Remember the 12 percent plus inflation rates of the '80's? Also, those citizens who depend on money market savings accounts will have their income reduced and spend less, further restricting demand.
Their whole purpose for this reduction is to prop up the financial industry's losses and helping those institutions which caused the mortgage meltdown by providing loans based on thin air to begin with. How sad!
Thursday, June 21, 2007
We don't need another election decided by the US Supreme Court.
Mayor Bloomberg would undoubtedly make an excellent president. However, running as an independent will only drain votes from both the Republican and Democrat candidates and confuse the election. We all know that Ralph Nader was responsible for the election of Bush in 2000 by draining away Democratic votes.
Please Mr. Bloomberg, reconsider your entry into the 2008 election. Yes you are certainly capable of running the country, yes you are financially able to fund your campaign, but you will not be able to win without one of the major parties backing. Your role will only be one of spoiler and we don't need another election decided by the US Supreme Court.
Please Mr. Bloomberg, reconsider your entry into the 2008 election. Yes you are certainly capable of running the country, yes you are financially able to fund your campaign, but you will not be able to win without one of the major parties backing. Your role will only be one of spoiler and we don't need another election decided by the US Supreme Court.
Wednesday, March 28, 2007
Social Security and NY Times
This is an answer to a column written by John Tierney of the New York Times.
John,
There are a some things you didn't reference in your article on Chile's Soc Sec system. You and Pablo were looking at a specific point in time when comparing your SS amounts. Had the Chilean economy been downsized by a tech bubble, ie like the US, his pension would have been significantly less.
Second, you included the mutual fund management fees in Pablo's 12% deductions for his retirement plan. I don't believe that is correct. The Chilean plan requires a mandatory 10%, per the CATO institute. These costs would run, in US dollars, 1 or 2% of the return. A recent figure on the Chilean pension fund return has been 10%. Subtracting the management costs of 1-2%, the return is 8-9%. The current US SS funds are returning 6%. Further, Warren Buffett has predicted Stock Market returns, over the next 20 years, at 6-7%. This was in his 2003 letter to his Berkshire investors at their annual meeting.
The US SS fund, while not equaling the Chilean returns (at a point in time) are guaranteed by the US government. While Chilean fund will guarantee a minimum pension amount only.
Fourth, the current Chilean government is spending $6 Billion dollars annually to ensure the minimum pension for its already retired workers. This represents 25% of it's GDP. Our SS program cost represent 6% of our GDP.
Fifth, President Bush is promoting "private accounts" and workers choosing their investments. Not really what is in the details. His plan is based on the Chilean plan so the workers investment choice is ONLY mutual funds. There are 5 companies in Chile authorized to manage the pension plan. The workers choice amounts to selecting one of these companies. The company then makes the investment choice.
Private accounts, in the US SS plan, would add several trillion dollars to the US debt, in order to kick the program off. The country cannot afford it, and it does nothing to change the predicted shortfall of funds in 2042..
Thanks for reading,
Ron
John,
There are a some things you didn't reference in your article on Chile's Soc Sec system. You and Pablo were looking at a specific point in time when comparing your SS amounts. Had the Chilean economy been downsized by a tech bubble, ie like the US, his pension would have been significantly less.
Second, you included the mutual fund management fees in Pablo's 12% deductions for his retirement plan. I don't believe that is correct. The Chilean plan requires a mandatory 10%, per the CATO institute. These costs would run, in US dollars, 1 or 2% of the return. A recent figure on the Chilean pension fund return has been 10%. Subtracting the management costs of 1-2%, the return is 8-9%. The current US SS funds are returning 6%. Further, Warren Buffett has predicted Stock Market returns, over the next 20 years, at 6-7%. This was in his 2003 letter to his Berkshire investors at their annual meeting.
The US SS fund, while not equaling the Chilean returns (at a point in time) are guaranteed by the US government. While Chilean fund will guarantee a minimum pension amount only.
Fourth, the current Chilean government is spending $6 Billion dollars annually to ensure the minimum pension for its already retired workers. This represents 25% of it's GDP. Our SS program cost represent 6% of our GDP.
Fifth, President Bush is promoting "private accounts" and workers choosing their investments. Not really what is in the details. His plan is based on the Chilean plan so the workers investment choice is ONLY mutual funds. There are 5 companies in Chile authorized to manage the pension plan. The workers choice amounts to selecting one of these companies. The company then makes the investment choice.
Private accounts, in the US SS plan, would add several trillion dollars to the US debt, in order to kick the program off. The country cannot afford it, and it does nothing to change the predicted shortfall of funds in 2042..
Thanks for reading,
Ron
Privatization of Social Security? Bad idea!
Why? It will harm the SS system in two ways:
1.)It will immediately reduce the surplus (available through 2012) that exists today;
2.)This will cause the government's general tax fund to pay out more than it takes in much sooner, thus raising taxes, eventually. This will add to the already growing deficit of 500 Billion dollars and more, annually.
Even more important are other issues:
1.)Lack of investment knowledge by most people.
As an example, before Enron, 80% of the workers had 90% of their 401ks invested in their own company stock. Never a good idea. This shows lack of investment wisdom; 2.)Even if everyone understood the investment arena, the average working person will not take the time or have the level of interest, to manage their savings to maximize future income, asset growth, and maintain some security.
The government, probably through a contractual arrangement, will have a large brokerage firm manage these personal accounts. Since these firms are major contributors to political campaigns, jockeying for these lucrative investment accounts would present a tempting area for further scandals and mis-appropriation of important retirement funds.
Since no less an expert than Warren Buffet predicts only an average 7% return on stocks over the next 20 years, it seems that any privatization proposal will not greatly increase the return for SS funds over what they already earn in interest on the IOUs from the US Treasury. Particularly when you subtract the individual fees charged (1%-2% on average, based on average fees for 401k plans today) to manage these accounts from the predicted rate of return of 7%. Yes, Mr. Buffet could be wrong, but his expertise speaks in support this prediction.
The only true beneficiary of this privatization proposal will be the Brokerage Houses who manage the accounts. Conservative versus Liberal politics aside, the purpose of Social Security is to benefit the individual not investment firms.
Why? It will harm the SS system in two ways:
1.)It will immediately reduce the surplus (available through 2012) that exists today;
2.)This will cause the government's general tax fund to pay out more than it takes in much sooner, thus raising taxes, eventually. This will add to the already growing deficit of 500 Billion dollars and more, annually.
Even more important are other issues:
1.)Lack of investment knowledge by most people.
As an example, before Enron, 80% of the workers had 90% of their 401ks invested in their own company stock. Never a good idea. This shows lack of investment wisdom; 2.)Even if everyone understood the investment arena, the average working person will not take the time or have the level of interest, to manage their savings to maximize future income, asset growth, and maintain some security.
The government, probably through a contractual arrangement, will have a large brokerage firm manage these personal accounts. Since these firms are major contributors to political campaigns, jockeying for these lucrative investment accounts would present a tempting area for further scandals and mis-appropriation of important retirement funds.
Since no less an expert than Warren Buffet predicts only an average 7% return on stocks over the next 20 years, it seems that any privatization proposal will not greatly increase the return for SS funds over what they already earn in interest on the IOUs from the US Treasury. Particularly when you subtract the individual fees charged (1%-2% on average, based on average fees for 401k plans today) to manage these accounts from the predicted rate of return of 7%. Yes, Mr. Buffet could be wrong, but his expertise speaks in support this prediction.
The only true beneficiary of this privatization proposal will be the Brokerage Houses who manage the accounts. Conservative versus Liberal politics aside, the purpose of Social Security is to benefit the individual not investment firms.
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