In about 6.5 months, I will be free of credit card debt for the first time since 1998. Much like Inigo Montoya and the “Revenge Business”, now that it’s over, I don’a know what to do with the rest of my life.

Readers of Consumerism Commentary have proven their wisdom many times over, so I’d like to take that into consideration. Please visit my YayBoo page on the subject and help me prioritize my next steps.

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I have never been a fan of a monthly budget. In early 2002, when I admitted I was spending more than I was earning, I forced myself to enact categorical limits for my expenses. It helped for a short time, but it wasn’t long before I found myself with a new spending philosophy and more income. The system of budgeting eventually became less imperative. I was in the habit of controlling my spending, and the shackles of a budget were not for me.

Also, my budget was frequently off. In a category like clothing, for which I may have budgeted $25 a month for new clothes, I may be significantly over the limit one month while under the limit for several following months.

The “envelope” budgeting system lets you carry over the unused surplus in one category to be used later. If I spend only $10 in clothing in April, the remaining $15 can be added to my available funds in May. For me, if I were to budget, this flexibility would be one of the most important aspects. Also, I would require the flexibility to adjust my budget whether life changes require an increase in spending or if my observed patterns are different than I expected.

But what good is a budget in terms of motivation for real change if you know you can adjust it to fit your desires as you progress?

People generally don’t budget well when projecting monthly expenses. There is a tendency to underestimate true expenses, particularly when actual historical data aren’t used as the basis. A budget in this form creates expectations which, if not met, could lead to lowered motivation. A budget abandoned after the first few months is a wasted exercise.

A recent study concluded that a budget based on yearly expenses will be a better spending plan. People tend to overestimate their expenses when they consider the entire year ahead. Actual spending will have a better chance of falling within the budget, and this success could motivate further budgeting.

By looking at your expenses over an entire year, you give the bumps a chance to smooth.

If you are bored or frustrated by typical budgeting, particularly the way budgeting is designed in software like Quicken and Money, try looking at the larger picture rather than focusing on fluctuating monthly expenses.

The Year of Magical Budgeting [New York Times]

About the author: This is a guest post by the anonymous author of the blog Father Sez, a father of four children who wishes to share with and learn from other parents with the goal of preparing children for facing the world independently.

You know your financial life is in a mess. You know the steps you should take in order to straighten your financial life out. You set SMART financial goals and developed plans to achieve these goals. You figure that if you keep plodding at your plans you’ll eventually reach your goals.

Life is not often this simple. There will be obstacles. Old habits may be a little hard to break.

Having a turbo charger will help.

And what would that be? Simple, start your own personal finance blog! A blog that would chronicle your past, your present goals to transform yourself, and your journey to achieve these goals.

a) The Dumb Little Man wrote a great article on the 7 common reasons why people fail to achieve their goals. Prominent amongst them was failure to write down the goals, failing to review them periodically and not having a support group.

Your blog by its very nature will overcome these. This happens by the very process of you writing up your posts, doing the research that may be needed for the post and the comments that your readers would be making. And very importantly on a regular basis.

b) Having a goal buddy is accepted as a powerful aid to achieving goals. They provide motivation, accountability and preserve our determination. I am sure you’ll agree that it’s not easy to find a goal buddy. With your blog, the readers in the community you build will be your buddies. They’ll give you continuous motivation, accountability and determination.

c) Once you have started your blog and announced its supporting mission statement, you’ll start feeling that you have a duty to perform—a duty to studiously and strenuously work to achieve your goals. You’ll feel that you are a role model to your readers.

Read how the act of not following his own suggestions for a mere two months affects Glbl Guy. He confesses this slip up to his readers, whom he calls his accountability partners.

Incidentally, he received a whopping number of comments, every one of them supporting and encouraging him and to overlook the lapses as just being human. You cannot get a better community of goal buddies than this!

d) Receive continuous guidance, tips and resources on improvements that can be made in your plans. The blogosphere is incredibly generous when it comes to sharing information and tips. As you proceed on your blogging journey, you’ll find yourself reading a lot of other blogs. And you’ll find tons and tons of advice and help.

You can get solutions to almost every obstacle that you may meet in your own journey of financial transformation. Tips on frugality, 100 ways to reduce your energy bills, how to prepare your budget, financial calculators, or understanding risk, all are answered in other blogs.

Many of the blogs I read and respect were set up for this very reason.

For example, Flexo created Consumerism Commentary to “hold himself accountable for his finances.” Ana of Debt Free Revolution wants to detail her debt reduction efforts and strategies.

Present day technology has made it easy to create and maintain a blog. While some people may swear by online tools that help in our goal setting and achieving process, I suggest that starting a personal finance blog (or a fitness/health blog, if getting rid of excess weight is your goal) is a far better option.

Just starting a blog for the sake of starting a blog will not be of much use. You must first have a will, a will to transform your life. When you have this will, the blog will turbo charge your journey to transformation.

To start your blog, visit WordPress.com. If you are joining the personal finance blogosphere, add your blog to the index at pfblogs.org and get insight about running your blog at the MoneyBlogNetwork Forums.

To read more about finance and family from this author, visit Father Sez and subscribe to the blog’s RSS feed.

For the first time in several years, I decided to design a budget for myself. I’ve never been a fan of budgets. While I used one when absolutely necessary to get myself on track initially, after recovering from low income and high expenses, I decided to ditch the idea when I was comfortable spending significantly less than I was earning. My prevailing thought was, Why restrict myself if I’m managing to spend only on necessities, save for short-term goals, and invest for long-term goals?

Budgeting is great, even necessary, for people living pay check to pay check or if living is otherwise tight. It’s a great tool if it is implemented intelligently and if it is flexible. There’s no reason to beat yourself up if you’re over one category by 10% for example, particularly if you can balance out the difference in another category or in another time period. The budget has to make sense as well. Don’t set the budget too low to reasonably meet or too high to be pointless.

Part of using a budget is reconciling your actual spending against your budgeted spending. I intend to do this on a quarterly basis this year, which will smooth out some of the monthly bumps. As this is the first time I’ve worked with a budget in a long time, I thought it would be a good time to review the first month. Additionally, the MoneyBlogNetwork is encouraging a writing project this month on budgets, so the timing works out well.

Continue reading to see my first Actual vs. Budget report. Click on the thumbnail to zoom in on the data. Read the rest of this article »

As January comes to a close, it might be a good idea to take a look at the year-long goals I created for myself at the beginning of the year and my progress so far.

Goal 1: $100,000 in additional income. As of today, I am right on track for earning $100,000 outside of my day job. Anything can happen this year, however. I have to consider the possibility that this income will be reduced to almost nothing with a slight change in Google’s algorithms, for example. I will also be voluntarily reducing certain portions of my income next month in the hopes of retaining consistent income growth in other areas. (Text link ads will be phased out on Consumerism Commentary and a number of other websites.)

Goal 2: Contribute $15,500 to my 401(k) and the maximum to my SEP IRA. In January, I contributed $861 to my 401(k), not including my employer’s matching contribution. In order to meet this goal, I will need to increase my contributions. I’ll add a few more percentage points during the next open trading window which will likely occur around the time I receive my raise and bonus (if I do receive anything). The timing of the next 401(k) increase will depend on some other job-related factors.

When I finalize my taxes, I will have an idea of how much I will be able to contribute to my SEP IRA.

Goal 3: Eliminate $13,000 of student loan debt. I’ve started by increasing my monthly payment from $127 to $250. That’s obviously not enough to get me there by the end of the year. After tax season, I’ll have an idea of how quickly I’ll be able to pay off the remainder. With the interest rate massacre occurring among the high-yield savings accounts, I am anxious to use some savings to pay off the loan (while keeping in the mind I’d like to keep enough lying around in savings to cover a down payment at some point).

Goal 4: Accumulate $40,000 in savings for a down payment. I added to savings this month, but not by much. My “Relocation Fund” is approaching $5,000, but once I pay my taxes, I’ll have a better idea of how I can redistribute the savings towards various goals.

Goal 5: Choose two or three charitable organizations, grant $5,000, and contribute $10,000 to the charitable fund. In my 2008 budget, I set aside $5,000 in both June and December for charitable contributions. I haven’t decided on any organizations yet, but I am thinking about contributing to the group I used to work with despite last year’s decision to disassociate myself.

Goal 6: Increase net worth to $210,000. Thanks to the stock market, my net worth has made no progress in the first month of 2008. My non-invested assets have increased this month, but everything else is down. Almost all of these investments are allocated in equities to last until retirement, so this “fluctuation” isn’t bothering me right now. If poor stock market performance continues this year, I will have a tough time making this goal.

All in all, it’s “too early to tell” whether my progress so far this year will help me approach my final goals for the year. How about you? Are you on track for meeting your goals and resolutions?

This article is part of the MoneyBlogNetwork’s monthly group writing project.

My mother and I have recently started the journey to retirement together.

By together, I mean that she’s starting to consider retiring in the next few years, while I’m realizing just how much help she’s going to need in order to get there. I’m up to the challenge, but it’s going to be a lot of work.

She’s a long-term state employee, so she’s eligible for both a pension and Social Security benefits. That’s the easy part. The challenge is in figuring out her budget and the rest of her financial situation, which lies obscured within a heap of unopened envelopes.

Luckily for Mom, most of her bills are set up for automatic payment, but her propensity to ignore an entire year’s worth of mail is disturbing. During a visit to her home last week, I asked for more information on her investments, and she just shrugged and pointed me to the pile. She’s got no idea what investments she owns, nor any estimate of their value.

To me, this is completely unacceptable. I know instantly that because she’s not even aware of what monies come in or out, she’s presently living above her means. I know this because I learned her savings account has been dwindling, but she’s been blissfully unaware of that as well.

So, how to fix it? Read the rest of this article »

I decided this year that a rudimentary budget would help me further analyze my spending beyond my monthly income and expense reports. Since moving to my new apartment last July, my discretionary expenses have been increasing. Perhaps designing a spending plan and evaluating my real expenses against the budget each month will help me rein in some of that spending.

To create this budget, I examined my expenses from 2007. It’s reasonable to expect that costs for certain items, like gasoline and groceries, are going to increase. Some predictions call for runaway inflation this year, but I’m taking a more practical approach. I’m also using conservative estimates for my income. I’m forecasting a 3% salary increase in March, below my expectations, but anything can happen in the corporate environment. I haven’t included a bonus in the forecast, although I expect to receive one in February or March.

I’m also budgeting income from other sources steady at $6,000 per month. I hope that this is a conservative prediction. My goal for 2008 is to earn a total of $100,000 outside of my day job and I won’t get there earning $6,000 each month.

Keep reading this article to see my budget worksheet followed by more explanation. Clicking on the thumbnail will present a larger, more legible chart.

While most line items are consistent from month to month, I adjusted the months in which I will receive three pay checks. I also adjusted my forecast rent expense for the month I renew my lease—I’d be surprised if my rent did not go up. It may not increase 10%, but it seems like a conservative guess. The total rent budget for the year accounts for 15% of my projected income. I’m comfortable with that level of spending.

All budgeted expenses, discretionary and non-discretionary, add up to only 54% of my total projected income. This means I have a a significant portion of income not earmarked for spending. I intend to use the surplus to pay off my student loan debt this year (another one of my goals) as well as save and invest as much as possible. The surplus will also help me pay for any unexpected decisions I make this year, and I’m “expecting the unexpected.”

I’ve simplified the categories I normally use in my monthly reports in order to add flexibility and not tie myself down too much. I think I included the major categories, but this is my first attempt at creating a budget in several years. If there’s anything I’ve left out, please let me know.

6:30 pm Update: I’ve fixed calculation errors in the table, so view the graphic again if you were confused the first time.

Businesses use budgeting to forecast income and expenses for the year. With a budget, individuals who manage companies’ money will have a decent of idea of how much cash they need at any time of the year to meet the company’s obligations. Personal budgets work the same way. At the beginning of the year, it’s helpful to determine a rough guideline for future spending.

Personal budgets are the most useful for people whose spending approaches or exceeds their income. For people in this situation, sticking to a plan is the most important aspect to improving financial condition. Saving for the future can only take place when the amount spent each year is less than the income earned. Otherwise, debt increases each year. A debt that grows each year is like slavery; more and more of the work you do and the money you earn goes to paying someone else rather than yourself. Additionally, interest expense should generally be unnecessary, unless the cost of debt is less than the income you are generating due to that debt.

It’s best to avoid debt and its expense as much as possible, and a budget can get someone to that point. Budgeting helped me when I quit my low-earning non-profit job. First I took an inventory of my situation and reflected on a few months of income and spending, using the free-at-the-time personal finance software Moneydance. From there, I could take some educated guesses about my future spending, targeting areas where I had to cut back until I could increase my income.

Now that I’m in a better financial position, I argue that a budget is no longer a requirement. One of the most important aspects of personal finance is to spend less than you earn. A budget gets you to that way of living. Once you’re comfortable and once you’ve limited your bad habits, a budget is not as urgent. If you’re watching your spending each month, you can easily adjust without a budget. However, if you are living paycheck-to-paycheck, a budget is going to keep you from getting behind month after month.

In a former job, I prepared “Actual vs. Budget” reports for the company. The areas of the company that provide services to the business units don’t make money from the public. There is little opportunity to earn more money for the company in these areas, so the best way to help the corporation meet its financial goals was to cut costs as much as possible. Thus, vice presidents wanted to review their performance against the budget on a monthly basis.

There is a tendency to get carried away with personal budgets. While those living on the edge of spending all their income or more should scrutinize each time they part with their funds, living one’s life chained to a spending plan is unfulfilling. If my income or savings allows for it, I want to be able to overspend. I don’t want a budget that controls me. I don’t want to feel nervous or anxious about spending money because I may be going beyond an arbitrary amount I set for myself months prior.

Therefore, a budget for someone with a solid control of their finances should be a rough guideline. There should be no punishment when spending goes over the plan as long as it’s not indicative of a troubling trend. Budgets should be adjustable. There are many times when life changes come unexpectedly. (Do you have an emergency fund?) It’s not out of the question to discard a budget and start over if circumstances dictate broad changes.

That is the point of view I have decided to take when developing my budget for 2008. I haven’t created one since 2002, and even then, I abandoned it within a year because I managed to get myself in gear within months. Nevertheless, I’ve decided to design a rough personal budget this year. My spending in the past few months has increased, mostly because I was in a position to do so and I had been putting some purchases off for years.

Each month, in addition to my balance sheets and income statements, I will publish an actual vs. budget report. This will help me identify the categories where I consistently “overspend” (according to my own guidelines). Though Quicken helps me do this now, I would say that it is simply too detailed. Rather than the 41 categories I present in my monthly report, and the many more I have in Quicken, my budget reports reduces my spending to a total of 9 non-discretionary and 5 discretionary categories.

I will post my spending plan tomorrow morning.

Image credit: Jeff Keen