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Wednesday, November 30, 2011

GETTING ORGANIZED: Fixing a Negative Cash Flow Budget

This week I thought I would continue our discussion on creating a household budget. Last time we covered HOW to create a basic plan or budget. If you recall, I had you create two budgets, one from memory and one from reality (based on banking statements and receipts).  Hopefully doing this exercise has given you some insight on your spending habits. Now, most people (hate to generalize) that don’t follow a plan of some kind tend to run out of money before the end of the month, am I right?  So today I just want to touch on what to do when you have discovered that you have a NEGATIVE net income (expenses exceed your income). 
Where to start? In the most simplified terms, if you have a negative net income, you either have a spending problem or an income problem. So I’m asking you, which is it????
I can hear it now…”If only I made $10,000 more, I could save, or I could pay off this or that”. Well we all want to make more money, but what are you going to do in the mean time? I tell you, you will not be successful if you have a negative cash flow every month. This means you are most likely going into debt to cover your expenses.  First things first, you need to develop a plan (budget) that balances. Wow, a balanced budget!  Something even Congress can’t seem to do! 
Okay let’s get started. You have your piece of paper, right; the one with all the categories of expenses? Well get that out and at the bottom of your paper you will have the amount of your NEGATIVE NET INCOME amount; this is the amount you need to cut back by. 
There are two ways to fix this: Priority OR Balanced
1)      Priority Approach
Take out another paper and put your income at the top of the page.  Now re-list those categories, but in order of importance.  Let me help you…1) Food, 2) Utilities, 3) Shelter, 4) Transportation, and so on…Once you have that list completed, you will use it as a guide on how you will spend your money…all the way down the page. You will stop when you reach zero (net income). Everything else gets cut.
 
2)      Balanced Approach
This involves cutting a little of everything. You have the same list of categories, but you take a little out of everything that is discretionary, until you reach your needed number. Lots of ways to cut back…eat out less, reduce cable/satellite package, cheaper cell phone plan, clip coupons for grocery/household items, or DRIVE LESS! 
Okay, you get the point. Basically you have to make it BALANCE.  I recommend a healthy budget consist of 50% of income going to things you NEED (food, lights, shelter), 20% of income going to things you WANT, and 30% of income going to savings.
If you are wondering why I didn’t tell you to do that in the first place, it’s because the tendency is to load up your budget with a lot of ideals that don’t exist.  For example, before I started really paying attention, I thought we (hubby and I) only spent $250 for food/dining/household items, turns out it was more like $750 (yeah we were eating out a lot).  Well, I have tried and tried and the lowest I can get it is $450 (including diapers and household items).  I have to keep it real; I just need $450 a month, period. I can work with that reality much more then my imaginary $250 budget! Make Sense?
So, this week’s homework is to get your budget plan to BALANCE!
I know you are shy out there, but I would really like some feedback, have any of these exercises helped you?
Enjoy your week,
MsMoneyGuru

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