At the root of success or failure regarding a household’s finances is how well they control their spending.

A household that spends LESS THAN they bring in will be flush with cash that they can save, invest, and allow to grow.  They also will not fall into the debt trap which prevents people from accumulating wealth.

A household that spends MORE THAN they bring in in trouble.

The problem is that most households don’t take the time to track how much is going in and how much is going out.  I began this process three months ago using an online system called mint.com.  The exercise has definitely been an eye opener.

Jeff Opdyke wrote this article appearing today in the WSJ which talks about tracking and living under a “spending plan”.

A couple great points from the article:

*You can choose to eat out every day, or you can choose to replace your wardrobe, or you can choose to pay off additional principal on your debt balances, or you can choose to afford a getaway over a long weekend. Whatever you want to do with your money, you can do it.  But here’s the catch: You can’t do everything. (my underline)

*The goal of successful budgeting is learning to live within the bounds of your discretionary income. (He defines discretionary income as your income less all fixed monthly expenses such as mortgage/ rent/ other loan payments, utilities, etc.)

*The first item on your discretionary spending list every month should be an amount allocated to your savings account. A savings account is your first line of defense in a financial emergency, so fund the reserve every month to build an increasingly larger cushion with each passing month.

Contact me today if you’d like to set up a spending plan!  We do offer services that help households accomplish this task.

Let’s look at the math on this:

Let’s take a household that makes $75,000 per year.  This translates to $6,250 per month.

Monthly gross income: $6,250
50% housing payment: -$3,125
Income taxes (25% + 7%): -$2,000 (Household in Oregon pays both federal and state taxes)
Tax benefit of mortgage: +$400

Money leftover after mortgage and income taxes: $1,525

Utilities, Water/ Sewer, Phone: $200
Food: $800 (this assumes no eating out, groceries only @ $200 per week)
Gas for car: $200 (this assumes only $50 per week for gas)
Car Insurance: $75 (this is cheap!)

Money leftover after these expenses: $250

This household has $250 leftover each month to save for retirement, college savings, unbudgeted expenses such as car repair, house repair, etc..  What is absent from this budget?

*Debt payments: We’ve assumed that they own their cars outright and have no credit card debt even though they have very little margin in their monthly cash-flow.

*Clothing/ Personal care: Among paying for everything else the $250 leftover each month would need to buy clothes, haircuts, etc.

*Cable/ Internet expenses.

I think it’s pretty clear that the only way this household can survive is by taking on debt which turns into a vicious cycle.

The lending community needs to do a better job of being financial educators to our clients by stressing the importance of simply exercises like budgeting.  Furthermore consumers need to take responsibility and make better financial decisions.