By Jim Murphy, Personal Financial Management Counselor MCCS, Henderson Hall February 15, 2013
This is the second installment in a three-part series discussing the theme of the 2013 Military Saves Week campaign theme: "Set a Goal, Make a Plan, Save Automatically." Last week's article discussed "Set a Goal."
Make a Plan
But what if we are currently living essentially pay check to pay check? Or worse, what if we are increasing our credit card balance(s) each month and have no discretionary cash flow? If either of these situations prevail, we need to develop a budget more than ever. Not only do we need a budget, we need to track our spending to make sure we are executing the budget we set.
The best way to track spending is to draw a simple matrix on a piece of paper. We need enough columns for each category of expense we have in our budget, plus one column for the days of the month down the left side of the matrix. Each time we spend money or pay a bill we log the amount in the appropriate columns and on the correct day we spent the money. We should keep a running total at the bottom to see how close we are to the total we budgeted for each category. It helps to paper clip the receipts to the sheet so we can remember exactly what we bought and where we bought it. We really need to track our expenses in this manner for a minimum of two months. Three is better.
Now we know exactly where our money is going. Now we have enough good information to make a budget action plan. Now we need to decide (1) where we can decrease expenses (maybe the modest wants have to be given up for a while), (2) where we can decrease the use of credit (that should be easy), (3) if we can increase income (normally a challenge for military Families). We set in motion the actions necessary to decrease spending.
Here are five examples:
• We will buy a thermos jug and take our own coffee to work.
• We will increase the number of brown bag lunches to four times per week.
• We will reduce the number of times we eat out to two times per month.
• We will reduce expenses by eliminating or reducing the following wants/extra expenses: cable extras, using full service car wash, one video game a quarter instead of one a month.
• We will use the credit card only to buy gas.
Follow through on these action steps and the budget action plan will yield up the necessary discretionary cash flow to support our going after our S.M.A.R.T. goals.
To go back to the general financial goals in step one and the S.M.A.R.T. goals technique, financial goals can be whatever you want them to be, however near or far in the future, and at whatever price or cost that is associated with the goal. S.M.A.R.T financial goals must be specific, measurable, action-oriented, realistic, and time-bound: Specific: what do we want to purchase? or make a down payment, or fund over several years or many years? Measurable: how much does it cost? How large must the account be when we begin to draw from it?
Action-oriented: how much will we save per month and where will we save it?
Realistic: (1) the amount we intend to save will not cause us to use credit for other purchases we would normally make with cash/debit card, and (2) the amount is enough to make the purchase in a realistic time frame.
Time-bound: we want to buy the item in ___ years. [Less than a year is considered short-term; one to three years is considered mid-term; more than three years is long term]
The components of the S.M.A.R.T. goal model tend to overlap but it is clear we will need a reliable discretionary cash flow each month to save for or invest in the goals. In fact, most of us tend to have two or more financial goals in mind at any one time. We need a plan.