Quarterly Reports Making A (Gasp!) Budget

What kind of guy are you? Are you the kind of guy who carries a handful of cents-off coupons into the supermarket each week and who calls driving over to Pizza Hut a big night out on the town? Are you unbelievably dull but prudent?

Or are you the kind of guy who dresses right, drives right, drinks right--and who'll pay that extra $100 for good seats at the play-offs? Whose wallet swells with credit cards? I thought you were. This column is for you.

Now, don't get angry; what we're going to do today is make a budget. It's as much my fault as yours that you don't have one (well, you don't, do you?), because, like you, I've always thought it was too childish to write about. "First, tot up everything you own and subtract from it everything you owe," I've always written, itching to get on to the spice. "That tells you your net worth. Then, to make it grow, spend less each year than you earn. To do that," I've always written, "make a budget." And then, having paid homage to your budget in all of three words--"make a budget"--off I'd go on some endless story about how I lost my shirt in a dry-cleaning scam.

What has recently dawned on me, however (your mom called, if you must know, and, frankly, she's worried sick about the way you handle money), is that not only have you not made a budget, you're not entirely sure--really--how to do it. Oh, you know how to do it. Any idiot can do it. But, well, should it be a weekly budget? Monthly? What about taxes? How should you handle expenses versus investm--Stop! I see that forefinger coming down to turn the page. Well, you just put it right back wherever it was. The girls will wait. This column could change your whole life. Because it's really not just a budget you'll end up with, it's an over-all financial plan.

First, get a pencil and a yellow legal pad. Next, tell your secretary to hold your calls. If you are a secretary, get a smaller legal pad. If you neither are nor have a secretary--if you've got a man's job, like driving a truck or operating a crane--do this at home, in your favorite chair, late at night, when no one can see you. (Real men make bets, not budgets.) With the ball game off.

No, no, no, no. Not next week. Now.

If you have a significant other, sit her or him down, too, and work on this together.

1. Tally your net worth.

OK. First thing you do, tot up everything you own, subtract everything you owe and that's your net worth.

In other words, before you even start to make the budget, take a few minutes to see where you stand. Down the left side of the first sheet of your pad, list all your assets and their approximate values--the house, the car, the savings account. Now, on the right side, list all your debts--the mortgage and car-loan and credit-card balances. Which total is greater?

If you own more than you owe, you have a positive net worth. You're already three steps ahead of the game.

If you have a negative net worth--you owe more than you own--you can see why your mother placed that call. (What's that? You say your mom's been dead for six years? You think just because she's dead, she doesn't worry?)

Subtract what you owe from what you own and write the total at the bottom of the page. My Net Worth:______ .

2. Set goals.

Where would you like to be a year from now? "Out of debt" might be an appropriate goal. And two years from now? "Out of debt, with $2000 in an IRA and $2500 in the bank and a stereo system that will wake up the dead." (At which point, over the din, you can gloat to your mom that there was nothing to worry about in the first place, O she of little faith. Show her your bank balance. Show her your paid-up credit-card statements. Then turn down your amplifier and let the poor woman rest.) And five years from now? "A net worth of $20,000, headed for half a million."

It is to reach these goals that you make your budget. Write them down on the second page of your pad. Don't make them too aggressive. Try to set goals that, after going back and forth with your budget for a while, you secretly think you'll be able to exceed. If you set goals you can meet and beat, you'll have fun and satisfaction doing it. If you aim too high, you'll never feel you're doing well enough.

You can still have unwritten goals and hopes and dreams--by all means!--but don't make them part of your official financial plan. Think of them (and not too often, if you can help it) as icing on the cake. Sure, you want a Porsche. Everybody seems to want one. (Not me. I want to be able to make myself invisible and to be able to fly.) But it's really nuts to want one so much you're unhappy you don't have one.

In setting your goals, spend a little time thinking about the things you have (your health, for example, and a $359 box that will take you to a dozen colorful worlds at the touch of a button), in addition to the things you don't (eternal youth and a $1995 box that will display the same dozen worlds on a 36-inch screen).

3. Figure your annual earnings.

At the top of the third page, list all your sources of annual income: your take-home pay (just multiply your pay check by the 12, 24, 26 or 52 times a year you receive it), payments from Granddad's trust (and what a grand old dad he was), the $20 a week you pick up reffing little league, dividends, and so on.

Note that for most of us, it's not a long list. Take-Home Pay: $18,400. End of list.

Note also:

• Precision is not the goal. Ball-park estimates are fine.

• When in doubt, estimate low. That way, any surprises are likely to be pleasant ones.

4. Take a first pass at your expenses.

This is like naming all the states. If you picture the map and start with Maine, gradually working your way south and west, you will come up with 43 states. Then you'll remember Arkansas (if you're from Arkansas, you'll remember Delaware) and a few others and get to 47. The last three are murder, though you know them perfectly well (Nebraska! Of course! Alabama!), and you may even have to sneak a look at the map to find them.

So it goes with budget categories. You'll quickly come up with headings to cover most of your expenditures, though budget categories, unlike states, have no preset boundaries. You get to define the boundaries that make sense for you. You might have one broad category called Entertainment or several narrower categories adding up to it: Bar-Hopping, Dinners, Movies, Records, Video Rentals, Books and Magazines, Theatrical and Sporting Events, Hookers. (Did I say that?)

Nor is there a specific number of budget items, the way there's a specific number of states, so you won't know with quite the same certainty whether or not you've missed a couple. You'll think you've thought of everything, just as, until you count up your list of states, you think you've hit them all. But, of course, you have not. (Gasoline! Of course! Lawn Supplies!)

I could make it easy for you by listing 100 sample categories, but what am I, your accountant? No. I am merely your mom's last, best hope of saving you from homelessness. The ranks of the formerly middle-class homeless are reportedly exploding (one budget category, accordingly: Charity! Of course!), and homelessness is not something I think you'd be good at. You know how you used to come back even from overnight camping trips with a fever and a rash.

So list your own budget categories; but, if you get stuck, sneak a look at the map--last year's checkbook and credit-card statements. Under which headings would last year's expenditures have fallen? (Miscellaneous! Of course!)

Next to each category, estimate what you currently spend. If you haven't any idea what you currently spend--well, all the more reason to be going through this exercise. Two nights out a week at, oh, $75 apiece, for dinner ($45) and a movie ($10) and gas and parking or cab fare ($10), plus a little nightcap ($10) on the way home? That's $7800 a year--call it $8000.

Some categories, like this one, are best thought of in weekly terms and multiplied by 52. Your rent or mortgage payments and electric bills are naturally thought of in monthly amounts and multiplied by 12. Your semi-annual trips to the dentist are multiplied by two--but don't include them at all if you're reimbursed for dental care by your insurance. Reimbursable expenditures don't affect your financial plan, so ignore them.

On your first pass, jot down both the annual expenditure and the way you figured it ($75 twice a week = $8000). Make no effort to economize. When in doubt, estimate high. Round up. Your auto insurance runs $875? Call it $1000.

Leave for the end of your list those "expenditures" that aren't really expenditures at all: investments. The $2000 you voluntarily contribute to an IRA is not like the $2000 you blow on a weekend in Tangier. It's cash that merely moves from one pocket to another. Similarly, spending $40,000 on an Oriental rug, if it's really worth $40,000 (as the ones that fly clearly are), isn't spending money at all. It's merely shifting funds from one investment, like a savings bank, to another, like a rug. (If the rug would fetch only $25,000 were you immediately to resell it, then you have, in effect, invested $25,000 in a rug and spent $15,000 on your living room.)

If you buy a new car every four years, for cash, don't budget zero for the first three and then $12,000 for the fourth; budget $3000 a year (plus maintenance, plus insurance). If you buy it on time, as most people do but with the help of this column you may someday not have to, just budget your monthly payments.

If you own your home, include an allowance for maintenance and repairs, even though you can't be sure when something may need fixing. If you budget $1500 a year, planning to repaint, and the roof leaks--well, this year you might patch the roof and, if funds are scarce, hold off repainting until next year.

5. Take a second pass at your expenses:

What have you forgotten? Clothes? Furniture? Appliances?

Inevitably, you'll think of other things, but that's why you do this in pencil. Your eraser will be a crumbly stump by the time we're done.

(Don't include Credit Cards as a budget category. It's what you charge to the cards that you're trying to keep track of. Only the annual credit-card fee itself and, more important, the credit-card interest are budget items.)

6. Refine your plan.

Add up your expenditures, not counting things that are really investments, like IRA contributions. How does what you expect to shell out compare with what you expect to rake in?

Ideally, you're raking more than you're shelling, and by enough to meet the goals you've set for yourself on the second page of this pad. Usually, though, you're not.

What's the shortfall? How far is your anticipated income from covering all your anticipated expenses, plus the $2000 or $15,000 or whatever it was you wanted to set aside to meet your goal for next year? Are you living a $50,000 lifestyle on a $40,000 income?

You have three ways to narrow the gap:

1. Spend less.

2. Earn more.

3. Set less aggressive goals.

Go back over your budget and, without being unrealistic, see what you can trim. How about buying a hibachi for $30 (not one of those ridiculous $159 gas grills that take all weekend to assemble) and converting some of those $75 nights out to $17 evenings of barbecued chicken ($15, including the briquettes, Chablis and salad) and Dr. Strangelove (two dollars at the video store)?

How about shopping around for cheaper auto insurance (or at least trimming that $1000 ball-park estimate we used to the $875 you actually pay)? Before, shopping for the best price on auto insurance was a chore you never got around to. Now it's still a chore, but a chore that's part of a grand plan.

How about asking your doctor to prescribe diazepam for $16 instead of Valium for $33 (diazepam is Valium) and using the 69-cent shaving cream instead of the $2.39 kind (shaving cream is shaving cream) and shopping in bulk when items are cheap and on sale?

These are repugnant notions to a man of your breeding, but even the British nobility has had to economize, auctioning off the odd heirloom. It's actually worse for them, because they're living a little less well each year, with no end in sight. You, on the other hand, are merely making temporary, voluntary sacrifices in order to pole-vault into an entirely new, more comfortable and secure economic stratum. You're not buying cheaper shaving cream when you buy cheaper shaving cream--you're getting out of debt and into mutual funds. You're not waiting until after 11 P.M. to call when you wait till after 11 P.M. to call--you're taking control of your future. (Better still, let people call you.) Even your sex will be better--yes, it will--because with money in the bank and a clear view of your future, you'll feel better about yourself. He drives an old Camaro, women will say, but he's hell on wheels in bed.

So first trim your budget.

But don't trim it unrealistically. Don't set yourself up to fail.

Next, trim your hair. ("And tuck in your shirt," advises your mom. "Look at you!") You can have your hair cut every three weeks at $25 a clip--$425 a year--or you can get one of those stainless-steel razor-blade hair-trimming doohickeys Brookstone and others sell for $11.95 and save, over five years, $2125, plus maybe 100 hours of getting to, sitting in and returning from the barber's chair. Or have it cut professionally a few times a year and trim it yourself the rest of the time.

7. Refine it some more.

If your expenditures and goals for saving still exceed your income, think about increasing your income.

Sadly, this often involves doing more work. I, for one, find it easier to trim expenses. But if you don't already work two jobs or live rent-free by acting as super for your building or drive a cab on weekends or wait tables on the side--and if you want to achieve your goals and work less hard in the future--you should consider it. For one thing, you'll earn more money. For another, you'll spend less. You'll be too busy and tired to spend it.

If you can't get or don't want more work, take yet another pass through your expenses--but a radical one this time. You could, for example, move to a cheaper home. You could give up skiing for jogging, take in a roommate or put the kids up for adoption.

Your other choice is simply to set less aggressive goals.

Round and round you go, juggling income, expenses and goals, brushing eraser nubble to all corners of the desk, until you arrive at an earning-spending-saving plan that adds up.

The process itself is useful. It helps you set priorities, see where your finances are headed and, if you like, head them somewhere else. What's involved here, really, is taking control of your life.

By estimating your income low and your expenses high, you set yourself up to succeed. That makes your budget something you enjoy keeping instead of a constant burden of guilt and discouragement--so you're more likely to stick to it.

(Speaking of discouragement, if you've got three little kids, don't be discouraged because you're unable to save much. For many, it's only before the kids are born and after they've graduated from college that any serious saving is possible. But even just funding an IRA as they're growing up, while it's not easy, can put you $250,000 or $500,000 ahead of the game in your later years. So try to set something aside.)

8. Blow $3.50 on a budget book.

Once you've settled on a plan, buy a simple budget book at any stationery store to track your progress. Or use the remainder of your pad to devise a record-keeping system of your own.

I know it's July. That doesn't matter. You don't have to wait until January to start.

What you're after is a separate sheet for each of your budget headings and then a summary sheet to track your monthly progress with the whole lot of them.

The individual budget-category sheets (one for Automobile Expenses, one for Groceries, etc.) should be numbered one through 31 down the left side of the page for each of the days of the month and one through 12 across the top--a column for each of the next 12 months. When you spend $35 on a new tie (are you out of your mind?), just enter $35 on the sheet you've labeled Clothing, under the proper month and on the line for that day's date. If there's room, you might even write a tiny note to remind you: Y.S.L. Tie.

At the end of each month, go through those pages and add up the entries in each category. Then take the totals and enter them on a single summary sheet.

Down the left margin of that summary sheet are your income and expense headings: Alimony, Baby-Sitting, Carfare. To the right are 15 columns. (OK, so tape two pages together. This is not my problem.)

The first shows your annual targets; the second, those same targets divided by 12--your monthly targets. (For some items--Christmas Gifts, say--you'd just leave this blank or make a little note to yourself, like: All Dec.)

The next 12 columns you'll fill in as you complete each of the next 12 months.

The final column is for summing the previous 12: your year-end total. For Clothing, it might read: $2135. (Three custom-made suits and that stupid tie.) How does that compare with the target you began with?

9. Keep track of what you spend.

Before you go to bed each night, enter the day's expenditures on the appropriate budget pages. To help remember what you spent, save your receipts and carry a 3?x5? card in your wallet with one of those stubby eraserless pencils.

Is all this too tedious for words? Fine. See if I care that your mother is beside herself with worry. See if I care that she thinks of little else but this.

You can facilitate matters by buying a preprinted budget book, as I've said. Or you can rocket your finances into orbit by computerizing them (of course, for that you'll need a decent computer, and for that you'll need $1200). Or you can forget all this nonsense and contrive another system altogether:

Step number one: Destroy all your credit cards.

Step number two: Deposit the first 20 percent of each future pay check in one or more investment accounts from which you never, ever withdraw funds.

Step number three: Put the remaining 80 percent in a single checking account and make do, no matter what, with the balance in that account. Forget budgeting and record keeping. If you're hungry but there's nothing left in the account, eat roots. If the rent's due but there's nothing left in the account, sleep in the street. If your car breaks down and you can't get to work until you repair it, sleep in a street near work.

It's an unconventional financial discipline but perhaps better than the one most people use--whereunder VISA tells what you can afford to spend (your available credit) and how much to pay each month (your minimum monthly payment) and takes 19.8 percent of your life.

10. Give yourself a break.

If you do take the time to plan your financial future and to track your progress as it unfolds, don't be slavish about it. Who cares if you forget to jot down every last expense? Who cares if you go over budget from time to time? The idea isn't to account for every penny compulsively and get a gold star; the idea is to spend less than you earn each year, get out of debt and build a secure, comfortable future.

One way or another, the future will come. With a little planning, you can have a say in what it looks like. Even the difference between coming out just $500 ahead each year, rather than $500 behind--a tiny swing--is the difference for a 25-year-old (figuring he can invest money at five percent after tax or borrow it at ten percent) between having $33,000 at the age of 55--or owing $82,000.

Hint:

Think of your budget not as your albatross but as your secret weapon.

"Do this in your favorite chair, late at night, when no one can see you. With the ball game off."

wherein we set your financial house in order once and for all