Budgeting For A Changing Economy - personal finance tips - Brief Article

Ebony, June, 2001

WHEN the economy fluctuates, the wise investor adjusts by tightening his or her budget belt and looking for new opportunities to increase the bottom line.

"The economy moves in cycles, and those cycles usually mean that someone will lose their job for a while," says Brooke Stephens, a New York financial advisor, motivational speaker and author of Wealth Happens One Day at a Time: 365 Days to a Brighter Financial Future. "It's why we always have to be prepared and do some saving. That saving starts with putting away a portion of each paycheck and putting it into an emergency fund. Have savings to cover and cushion you for six months."

However the change comes, you should be ready for any contingency--or opportunity--by creating breathing room in your budget.

The Revolving Wallet

Even the experts will tell you, beginning the process isn't hard.

"I believe every person should have a spending plan," says LeCount R. Davis, a Certified Financial Planner and the owner of LRD Management Group in Chevy Chase, Md., and editor-in-chief of the quarterly newsletter, Finance and the African-American Family. "Everybody should sit down and think about it. You don't always need the help of a professional; put it on paper."

Determine how much money you have to work with each month. Keep track of what you're spending for a month and see how the amount matches up with your actual income.

"You should know what's coming in and what's going out, or what we call cash flow," Davis says. "You would be surprised at how much we spend. We don't look at it. We just continue to spend."

Needs vs. Wants

After tracking your spending habits, separate what's necessary, or what Davis calls "basic lifestyle expenses," from the rest, or "discretionary expenses."

Basic lifestyle expenses include the mortgage, food and utilities. Expenses that involve personal judgment on how much will be spent fall into the discretionary category. Entertainment and shopping are examples of discretionary expenses.

Satisfied But Smart

Here's where things can get tricky.

Everyone should pay himself or herself first. Don't budget so tightly that it's difficult to enjoy the quality of life.

"You can cut a budget so close that you can cut your throat," Davis says. "It all boils down to the context of what you're making."

However, be careful. "If you can't pay the mortgage, you're not going to feel comfortable while you're on that cruise," Davis adds.

Avoid Financial Traps

Credit cards can be used to your advantage when proper habits are maintained. Stay in control of these tempting devices by examining the fine print for each card and making timely payments to prevent more charges.

"Use a concentrated approach with bills," Davis says. "Pick the highest interest rate and accelerate the payments until the debt is completely eliminated. Then, get to the point of paying off the bill when it comes."

Be realistic about long-term purchases, such as houses and cars. A poor decision at this stage could lead to headaches for years.

"A lot of people don't realize that if you buy a car, you should purchase some thing that is about 25 percent of your gross paycheck," Stephens says.

Re-evaluate Spending Habits

With so many options available for spending pleasure, it's easy to add extra weight to the budget.

"We are on a spending frenzy, which is why you see so many ads in our media and our community for us to get stuff," Stephens says.

For example, it's not uncommon to see people loaded with three phone lines, two 2-way pagers and a cell phone. Reconsider the purpose of these options.

"These are so small that people overlook them," Davis says. "We spend $200 or more per month on such items."

Other ways to trim excess from living expenses only require simple action.

Clip coupons with abandon. Raid the stores on the major sale days. Find a treasure at the outlet mall.

And don't be ashamed of it. Davis says the bulk of his clients--including the well-to-do investors--engage in these activities.

Start Saving--NOW!

Once the loose change starts to accumulate, put it away immediately and create a win-win situation. Either the extra money will back you up in case of a disaster or help you accumulate wealth for the future.

"People say, `I don't make enough to save.' Yes, you do," Stephens says. "Even if you start small, with just a dollar a day. The ideal thing is to put away 5 to 10 percent of your check. Have your employer put it in a credit union or in a money market account."

Remember: Fight the temptation to fold, make a few adjustments in your budget and maintain economic confidence.