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Money Guide – Budgeting

The following is adapted from “Living in the Village: Build Your Financial Future and Strengthen Your Community” by Ryan C. Mack.

– Budgets Are the Foundation of Your Financial Plan
– Your Budget Must Be in Writing
– Retailers Use Strategies to Persuade You to Spend

– The Steps to Creating a Budget
– Which Consumer Traps to Avoid

“Failing to plan = planning to fail.”

When it comes to accumulating wealth, some people take an offensive strategy by trying to earn more money, while others, take a defensive strategy by trying to save and invest as much as possible. However, the wise person increases his or her wealth by going on offense AND defense. And to help them do this, they use the most powerful tool in the personal financial planning arsenal…the budget!

Budgeting is basically comparing your income vs. your expenses to determine if you have a surplus or deficit. Ideally, you want to have a surplus, so you can use leftover income to fund savings accounts, special purchases or even investment strategies. For some people,”budget” is dirty word, but with careful planning and tools to make it fun, it makes the road to financial freedom much easier. Budgeting is not about depriving you of things you want: instead, it’s a tool that helps you get everything you want without sacrificing the things you need.

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Step One: Complete an estimated budget.
Pull together any check stubs you received from your job, old bills, grocery receipts, and anything else that would give you a history of what you have earned and spent. Don’t get discouraged if you don’t have any of this information handy- this is an “estimated” budget so just do your best to give a fairly accurate estimate of your financials. Click here for Estimated Budget Worksheet

Step Two: Complete the 30-day diary exercise.
After you’ve completed the estimated budget, create a journal for the next thirty days of all your cash inflows and outflows. All cashflow should be recorded, regardless of size. If you throw a penny in a well, write it down. If someone gives you a penny, write it down. This sounds very tedious and it can be at times, but just keep in mind you only have to do this once to get an accurate picture of your spending habits. You’ll be amazed at how much you spend on certain items. Also, it’s probably unwise to do this exercise during December or any other month in which you have atypical spending patterns. If you do the exercise once, and find that there were too many unforeseen events that caused irregular capital expenditures, do it for another month. Click here for a 30 Day Spending Diary Worksheet

Step Three: Fill out an actual budget.
Now that you have completed your diary, you have the information to fill out a more precise budget. This actual budget will be your guide going forward. Hopefully, you will have a surplus after completing this process. If you don’t, it’s time to make some cuts. A major wealth building principle is to live below your means. Many times individuals are not able to distinguish between needs and wants, luxuries and necessities. You’ll have to fight the tendency of turning your luxuries into necessities as your income rises. Did you ever consider Starbucks a luxury, but now after a raise you are having it every morning? If you want to achieve a consistently increasing net worth and financial independence, you must keep your expenses reasonably low even as your income rises.

If you keep expenses within the below parameters you’ll be in good shape.

Expense Targeted % of Total Income
Housing(rent/mortgage, insurance, real estate taxes, etc.) 28
Total Debt(rent/mortgage, car, credit card, etc.) 36
Savings(IRA, 401(k), brokerage account, etc.) 15

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The “Bogus” Sales Strategy
Why do people feel like they have won something if they find a sale? Retailers are completely aware of the psychological motivations behind consumers—they are always trying to get more for less.

How many times have you been walking down the street on the way to a place that is not a store only to be stopped in your tracks by a “50% OFF” sign? Let’s look into how it’s possible for retailers to significantly slash prices:

A store owner purchases a shirt from a supplier for $10 which is slightly above what is cost for the supplier to make the shirt. He marks up the shirt 400% to $40 and puts it on the rack. After some time sales of the shirt have slowed and he cuts the price by 50% to $20 and he puts a huge 50% off sale in the front window on bright red paper with white letters for the world to see. He still sells his shirt for 200% of what he purchased it for and is making a 100% profit on every sale. We are not saying that you shouldn’t purchase clothes, but only purchase clothes that you have made the decision to purchase. Dont be influenced by seemingly amazing deals to entice you to buy something you don’t need.

The “Guilt” Sales Strategy
Why is that store clerk so nice to you? Why does she offer to let you try on so many pairs of shoes? Is it because she feels kind or got up on the right side of bed that morning? Well, actually it is more than likely that she recently had a sales training that she was mandated to go through. This training gave her tips and strategies of how to more effectively make a sale. One of those tips? Allow the customer to try on as many shoes as possible. The more shoes the customer tries on the more likely the customer will feel guilty about walking out of the store without purchasing something.

Don’t ever be influenced by guilt – there is nothing wrong with changing your mind even if you seem to be at the point of purchase. Too many times people allow themselves to feel pressured by the misconception that they are ‘bad’ if they decide to walk out without making a purchase after their sales associate worked so hard.

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The “Impulse Creation” Sales Strategy
Ever walk around a store and make an observation that an item you saw last week is no longer there? You might think that it was sold and merchandise must move very quickly in the store. So much so that the next time you see something you like you decide not to waste time and purchase it right on the spot. You just fell victim to one of the oldest strategies in the game…the “impulse creation” sales strategy.

This strategy was created by those in sales who had a firm grasp of the psychology of the human mind. People have a tendency to want the things that they can’t have. Ever see a child discard a toy to the side with indifference only to want it again after it’s picked up by a sibling or friend? That toy suddenly becomes his favorite toy again. Stores play off these instincts of wanting what we can’t have. In the above example, that item wasn’t necessarily sold because it was off the rack. What could have happened is the following:

Chain stores understand that people are creatures of habit. They know that habitual shoppers of Store A Uptown will not necessarily frequent Store A Downtown. Understanding this they will move that coveted hat from Store A Uptown to Store A Downtown after a week to make it seem to the shopper as if the merchandise is really moving! This creates an impulse within the shopper to purchase those items of interest as soon as possible so they don’t miss out.

The “Credit Card Discount” Strategy
Does this sound familiar? “Would you like to save 10% on today’s purchase by signing up for a discount credit card?” It is said that the average American will spend an additional 35% just because they have a credit card in their pocket. They’re asking you to sign up for a credit card because they know that having the additional access to capital makes you much more likely to spend more money even with the 10% discount.

The “Lure” Sales Strategy
Have you ever asked why your favorite song is being played when you walk by a store? Or why it always smells so good? Everything from displaying your favorite clothes in the window to that salesman who grabs you to tell you about the super “specials”…retailers have done studies and research into what attracts potential shoppers and are pulling out all of the stops to try and get into your pocket.

Didn’t find what you were looking for in Money Guide:Budgeting? Send us an email at info@moneymovement.org and one of our experts will get back to you.

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