Where Does the Money Go?

by Gary Foreman

Dear Dollar Stretcher,
Do you have any sample budgeting forms? I am trying to get our family of five to stay on a budget. We have about $3000 per month coming in, but it seems like we can never make it check to check. I really need some help! I have read some information, but somehow I just can't get it right. I am using CCCS now but even that does not seem to help us. I have been paying the IRS for four years. Financially we are a mess. Any suggestions?
Sandra C.

Sandra asks a good question. In this complicated world, can you keep track of your finances without spending hours each week tediously going over "the books?" The answer for most families is yes. With a minimal understanding of math and finance you can construct a simple budget that will help you manage your money.

Sandra is trying to accomplish two goals. She knows that the money is gone at the end of the month, but she's not sure where it's going. Sounds simple, right? Yes, but it's important to know that goal. With that as our target we know that Sandra doesn't really need to track every penny. A lot of really detailed information is overkill for her needs. For instance, she'll have one category for "automobiles." She doesn't need a separate one for car payments, repairs, insurance, gasoline, etc.

Another example would be food and groceries. It's not important that she know how much they spend at different grocery stores. Nor does she need to know how much is spent on snacks. What is important is to find out how much they spend totally on food.

How are we going to accomplish that? I'd suggest that Sandra set up a simple two-level budget. The whole thing can be kept in one three-ring binder on less than a dozen sheets of paper.

We're going to need one sheet of paper for each major category of spending. Select your own categories. Some will be the same for all of us: housing, food, transportation, clothes, medical and insurance. Others will depend on your family: day care, property taxes, credit-card interest payments, college expenses.

You should be able to do this in 10 categories or less. If you have more, you've made it too complicated. Combine some that are similar. Each sheet should have the name of one category on the top.

On each sheet you're going to track expenses for that category. Picture something that looks like a check register. Starting on the left you'll have a column for the date. Next is a wider column for where the money is spent. To the right will be two columns. One will be to record expense amounts; the other will be to record the running total.

In case you were wondering, you won't be balancing this like a checkbook. So don't panic! All you'll be doing is recording your expenses as they happen. This will probably be your first psychological challenge. In a family of five someone is bound to say, "I don't know where every penny goes. And I don't have time to keep track, either!" And, they're right. You can't get a receipt from a soda machine!

Surprisingly, they don't need to. Allow yourself a category to include some smaller cash expenses. When George takes $20 for pocket money list that on the expense sheet. Try to get receipts when possible. If you get receipts for $7of the $20, turn in and list the $7 when you get more cash. But this time when George takes another $20, only list $13 ($20 minus $7 with receipts; you essentially listed that $7 twice, as part of the $20 and as the $7 with receipts, so you subtract it from the next $20 to balance you out).

Collect your receipts and list them on the sheets. At the end of the month you should have some idea of where your money is going. Most families find some surprises when they total up what's been spent. Food and entertainment are often unsuspected culprits.

Your next step is to take the totals from each of the category sheets and put them on a summary sheet. That page will have a line for each category. After you've listed each category with its total, you'll add them all up for a grand total of your monthly expenses. That's the moment of truth. Compare it to your take-home pay. If expenses are greater than income, you'll have trouble down the road.

If you need to reduce spending, look in the largest categories first. It's easier to find $50 in savings in a $500 category than in a category where you spend $200.

The next step is to turn your expense record into a budget. To do that you'll take your take-home income and divide it up among the different categories. This is a good time to allow for once or twice-a-year expenses like property taxes or Christmas gifts. Put your target for each category right on the top of the sheet. During the month, monitor your running total against that target. If your expenses exceed the target you'll need to make adjustments.

Don't worry too much about comparing yourself to what other people spend in each category. A budget really should be personalized. A couple of categories do deserve mention, however. If you spend more than 35% of your after-tax income on housing, it's going to be hard to balance your budget. Auto is another area; 20 percent is about the maximum here. Credit-card payments shouldn't be more than 10 percent of your income. These are all warning signs to help you avoid future problems.

Remember to start simple. You're much more likely to follow through with something that's easy to do. Yes, you'll probably find an area where you want more information. So start digging a little deeper in that spot. Not everywhere, just in that one area. Only gather information you'll use.

Once Sandra's family has gotten this far they'll face the second challenge of budgeting. What do you do when spending needs to be reduced? You can say that the budget doesn't work and refuse to make any changes. Or you can take the information and select the easiest place to cut expenses.

A budget cannot magically give you the will to change your financial future. But it can provide the information to make it easier if you do decide to take control.

The first step in solving a problem is recognizing it. The second step is facing it and seeking a solution. Sandra is to be congratulated for facing the problem. We wish her success in paying off those debts and a prosperous future.

Gary Foreman

Gary Foreman is a former financial planner and purchasing manager who founded The Dollar Stretcher.com website and newsletters in 1996. He's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com. Gary shares his philosophy of money here. You can follow Gary on Twitter. Gary is also available for audio, video or print interviews. For more info see his media page.

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