Tips for Trimming Your Budget

Part 2 of 2-part Budgeting Tips Series

What should you cut? What shouldn’t you touch?

Earlier this month, I shared my advice about budgeting tips — why it’s important, why it’s less scary and limiting than you think, and how to get started. As we face the uncertain times ahead that COVID-19 has only begun to show us, it’s more important than ever to get a clear sense of our finances and prepare for the worst.

Once you’ve got the facts in front of you with your newly created budget, and you know exactly how much money is coming in and going out the door, now it’s time to make some decisions. If you’re fortunate enough to be making more than you’re spending, you should be looking for ways to save the excess. But if you’re like most of us and living beyond your means, don’t beat yourself up. You aren’t alone. You’re already in more control and headed toward better financial health.

Here are my budgeting tips for cutting expenses and bringing spending down to a manageable level.

Start Trimming the Fat

Where can you make spending cuts? Chances are, a few cuts here and there will make a big difference, and they won’t be as painful as you’d think.

Perhaps you can carry our current norm of dining at home a bit more into the future, allowing you to curb some of that restaurant spending. And now that you’re drinking most of your coffee at home, maybe you realize that your afternoon latte can be an occasional treat, not a frequent habit. What about the baby magazine you’re still receiving, now that your “baby” is 11, or the magazine you’re getting that you’ve never read? Maybe now that you’ve had to miss your bimonthly manicure, you realize you could probably do your own nails from now on and save that $100+ a month. Or maybe your Disney+ subscription isn’t worth the one show you’re watching on it. The point is to identify expenses that aren’t necessary. Many of these things cost very little each month, but when added together, they come to hundreds, even thousands of dollars that could be put to better use. These are small budgeting tips that can make a big difference.

Set Priorities

Of course many expenses are not optional. Food, shelter, utilities, a vehicle, and gas … these things are vital to our survival. Pay those things first. You must have food to eat, a roof over your head, electricity, water, and a ride to work.

That said, however, it’s also important to point out that those expenses can be lowered. Eating at home is less expensive than eating out, for sure, but some stores may also be less expensive than others. Take note of how much food in your home is wasted; perhaps you can buy less at the store to ensure more is eaten. Not that you should restrict yourself to a diet of rice and beans, but look for ways to trim spending on your food items — buying generic brands, for example, or only paying with cash to prevent you from impulse buying.

The bottom line here is that if you’re struggling to afford even these most basic of needs, and cutting your other spending still doesn’t help, it’s time to take further steps to negotiate some lower living expenses. Your main goal, especially if your income for the near future is uncertain, is to conserve cash until you know you’re in a safer position.

Start Negotiating

Once you’ve cancelled unnecessary expenses, it’s time to play hardball and start negotiating lower payments on the necessary ones. Consider the following:

  • If you rent, talk to your landlord about options. In the midst of the COVID crisis, many landlords are accepting partial rent payments, waiving late fees, or even waiving rents altogether. Perhaps yours can work with you. You should know, however, that a federal freeze was placed on evictions due to the pandemic, so rest assured you won’t be thrown out in the cold as this crisis rages on.
  • If you have a mortgage, there may be resources available to help you. The Federal Housing Finance Agency has rounded up a page full of COVID-19 information and resources regarding mortgage assistance. Talk to your lender about your options.
  • The stimulus package enacted by Congress provided student loan holders a six-month break from payments. If you currently owe student loans, this is a great opportunity to save that money and put it toward other debts. No interest will accrue during those six months. After that six months is up, it may be possible to qualify for a hardship forbearance, which allows you to pause payments during times of financial hardship (although interest may accrue). Talk to your lender about your options.
  • Now may be the time to look for a better interest rate on your credit card. Call your creditor to ask for a lower rate, and if you can’t get one, maybe it’s time to shop around for a lower-rate card, then transfer your balance to the new card to lower your overall balance. Then look at paying down that debt, even if it means paying only the minimum each month and not adding to the existing balance.

Most creditors realize that something is better than nothing. If you find you’re unable to make a full monthly payment, let them know ahead of time and try to work out a payment plan. This can keep bill collectors off your back and help you stay in good financial standing as you get through this rough patch.

Pay Yourself

It’s important that every budget includes payments to yourself in the form of savings. I’ll talk in more detail in my June blog about savings tips, but you should make it a priority to put some money away each month into savings, even if it’s only $50. Work to build up an emergency fund of at least $1,000 so that you can deal with unexpected costs like car or home repair without breaking your budget or dipping into credit cards.

Money isn’t just for paying bills. We work hard and should be able to enjoy it, so by all means, budget a certain amount of money each month for discretionary spending. Knowing you have the freedom to spend a certain amount each month on whatever you want is a wonderful feeling and makes other limits easier to accept.

And if you can afford to save a lot more money, do. In this time of great uncertainty, it can be reassuring to know you’re putting money aside for the future, and encouraging to save for that trip you will eventually be able to take.

In the end, you’ll be surprised by how empowering it can be to create a budget. When you know that every expense you will encounter is accounted for and that you can live within your means, you will feel the opposite of restricted: You’ll feel freedom, and you’ll be relieved to know you have some control in a world that often — especially right now — feels out of control.

All of us here at Ludmila CPA are happy to help you get started with your budget, whether it’s recommending tools, helping you make ends meet, or setting financial goals. Contact us today to see how we can help. Hang in there, utilize these budgeting tips — we’ll get through this together.

There’s Never Been a Better Time to Create a Budget

Creating a budget is more empowering — and less scary — than you think.

I’ve been advising individuals and small businesses on financial matters for over a decade, and in that time there’s one suggestion I always make that consistently makes my clients squirm: It’s when I suggest that they make a budget.

I get it. The idea of creating a budget is scary. It means taking a hard, even embarrassing, look at what you’re spending. It means coming to grips with what money you have — or don’t have — coming in, and how that compares to with the money that’s flowing out. As they say, ignorance is bliss. Plus, it seems to involve will power, which many of us lack.

And we tend to equate the word “budget” with “limitations” or “restrictions,” which have negative connotations.

I’d like to offer a new way to think of budgeting: as a freeing exercise, not a limiting one, and as a way to feel IN control, rather than out of control.

Now that we’ve sheltered in place for two months due to COVID-19, our feelings of fear about the unknown and powerlessness in the face of unprecedented restrictions are overwhelming. For many in our community, the financial uncertainties we face have yet to rear their ugly heads. So while we’re still safe in our homes, worrying about what comes next, there’s never been a better time than right now to get an accurate picture of our finances and take control of them. Making a budget doesn’t have to be hard, and I promise it’s more freeing and empowering than you think.

How to Get Started

First, find a system that works for you. There are a million tools out there to help you get started. Personally, I like applications that connect to your personal accounts, so they can automatically track your income and expenses. Xero Cashbook software is what we use here at Ludmila CPA; contact us and we’ll be happy to help you set it up. This is a subscription-based program that costs $7 per month, but we’ve found its exceptional functionality to be worth that small expense, particularly for small businesses.

If you prefer something simpler without the bells and whistles, a simple Excel spreadsheet works fine as well, as do several personal budgeting apps. Many existing budget templates can be found online, which you can customize according to the types of expenses you have.

Track Spending

Once you determine your preferred system, it’s time to get a picture of your current spending. Contrary to what many believe, budgeting doesn’t begin with immediately imposing restrictions. Rather, it starts by taking some vital statistics. Hopefully you have records of your expenditures — if you don’t balance a checkbook, perhaps your credit card statements are a good measure of spending. Or simply comb through your online bank account summaries. Go through your statements for various monthly obligations, such as utilities, phone and Internet bills, grocery receipts, etc. Tally your receipts from restaurants or Starbucks runs. Consider how much you’ve spent in the last six months (typical months, that is) on dry cleaning, gas, parking, child care, and more. And don’t forget all your subscriptions! Not only do those magazine and newspaper subscriptions sneak up on us, but so do our cloud storage, email, domain hosting, virus protection, Netflix, Amazon, and other monthly subscription draws as well.

Start inputting the monthly totals into your spreadsheet or other budgeting tool until you have a fairly good picture of the last three to six months’ worth of spending. Remember to include line items for everything, from rent or mortgage, loan, insurance, car, credit card, and utility payments to your monthly clothing, dry cleaning, dining, movie, office supply, and travel expenses, and even savings transfers. Everything should get a line item so nothing is unaccounted for.

Determine Monthly Income

Your budgeting tool will, of course, ask for a total monthly income. If your income is consistent and predictable, this monthly total is easy to calculate. However, if you are self-employed or own a small business such as a restaurant, your monthly income can vary — particularly now as many brick-and-mortar businesses are shuttered. In that case, you could determine what a year’s income would be and divide by 12 to come up with a monthly average. As you proceed with doing a budget each month, you may find that you can predict what income will for sure be coming in over the next month and plan accordingly.

Compare Income to Spending

Here’s where the rubber meets the road: Are you spending more or less than you make?

For many people, this exercise is eye-opening. For some it reveals that they actually have more than they thought. For others, they find more money has been flowing out the door than in. But only when you see what the true picture looks like can you fine tune it.

Determine Spending Habits

With the data you’ve collected, look at trends in your spending habits. Are you subscribing to services you don’t use? Are you paying high interest on a credit card that could potentially be lowered? What about that unused gym membership? Is your twice-a-week latte habit eating into your budget? Are you spending a lot on dining out?

One of the few silver linings to come from the COVID-19 crisis is that much of our spending has been paused, so take advantage of this time at home to get a handle on where your spending has gotten out of control and create a plan to move forward, stronger.

Knowledge is power. Knowing whether or not you need to cut expenses — and by how much — gives you the power to make some choices and take control of your finances, and I promise you it will feel GREAT. Later this month, I’ll share tips with you for cutting expenses and negotiating lower payments.

In the meantime, contact us today to see how we can help. And stay safe!