Saving for a brighter day: with less discretionary income, many Americans are wondering how to set aside cash for emergencies. Here are a few tips on how to squeeze the most value out of the money you make

Black Enterprise, Nov, 2004 by Candace Bahr, Ginita Wall

A LOT OF MONEY PASSES THROUGH your hands each month. If you earn and spend $2,000 a month, that amounts to more than a million dollars during your lifetime!

Wouldn't you like to set some of that money aside for long-term goals rather than letting it sift through your fingers? By cutting back on some expenses, you may actually be able to live better and indulge in luxuries you didn't think you could afford.

To cut back, you have to know what you have in the first place. Then tailor your expenses to fit within your income, including money to save. The best way to do that is with a budget. For many people, the term "budget" is synonymous with "deprivation." Budgeting is like a financial diet, and nobody likes to diet, financially or otherwise. But like a sound nutritional plan, budgeting is beneficial, and it doesn't have to be distasteful. With a budget, you can jet more enjoyment from the money you spend, planning your finances rather than spending recklessly. You'll be happier, and your money will go farther.

Where Do You Stand Right Now?

Before you can plan for your future, focus first on your current finances. Use these seven simple steps to compute your present net worth, which is simply the total value of what you own minus what you owe.

If your debts are greater than your assets, you will come up with a negative number. That means you have been living far beyond your means, and it is time for serious action to prevent further jeopardizing your financial future. A positive number doesn't mean you are off the hook, however. Is your net worth high enough? Even if your net worth is higher than you expected, you may still feel uncertain about your finances. For example, if your liquid assets in Step 1 are less than your debts in Step 6, excluding home and car loans, you may feel awash in debt and out of control financially (see sidebar). If your retirement assets in Step 4 are minimal and you are fast approaching retirement age, you may worry about your future retirement well-being. If the personal use assets in Step 2 constitute the bulk of your net worth, you may realize that funding your future needs could require selling some of these assets and scaling down your lifestyle.

STEP 1

Cash.

Add the amounts in bank accounts, certificates of deposit, money funds, and cash in your wallet.

STEP 2

Personal use assets.

Total the value of your home, personal furnishings, jewelry, automobiles, vacation cabins, time-shares, and the like.

STEP 3

Insurance values.

Look up the current value of all cash-value insurance policies.

STEP 4

Retirement plans.

Add your IRAs, 401(k)s, SEPs, pension and profit-sharing plans, and other employer-sponsored plans. Include only the portion you would receive if you left your employment, which is called your vested share.

STEP 5

Other investments.

Stocks and bonds, mutual funds, investment real estate, limited partnerships, annuities, and the like, plus amounts owed to you by others and the value of your business go here.

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STEP 6

Debts.

List your debts, including mortgage, bank loans, and credit card debt.

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STEP 7

Net worth.

Add the assets, subtract your debts, and you have your net worth.

Budgeting 101

A budget can help you get a handle on your finances. After all, if you don't know where your money goes, you'll live and spend from day to day with no clear idea of how much money is moving in and out of your accounts.

Devising a budget may seem a daunting task, but it really isn't that difficult. To help you figure it all out, follow these four simple steps:

1 Create a worksheet so you can analyze where your money goes. Add budget categories that are uniquely yours: for example, if you are enrolled in school part time, you may have additional expenses for tuition payments, textbooks, and supplies.

2 Figure out where your money has gone. Go through your checkbook and credit card statements for the past year and list each check or itemized credit card charge in its proper category. Add the amounts in each category, and you will have a summary of your spending by category for the past year.

3 Create your budget for the coming year. Decide where you can cut back, and how much, and subtract the changes from the category totals. Divide the revised amounts by 12 to arrive at your preliminary monthly budget. Compare the total of all expenses with your monthly income, and adjust the expenses as necessary until your monthly budget equals your monthly income. Be sure you allocate as much as possible to the category "savings and investments;" 10% to 15% of your gross income is ideal. Getting the inflow and outgo to agree may take some doing, but persevere until your budget balances.

4 At the end of each month, see how close you came to your budgeted amounts. Once you figure out whether your spending was over or under your budget, jot an explanation into the column next to major variances. If you consistently exceed your budget, you will have to adjust your spending habits or find a way to increase your income so that you can accommodate your extra spending.