Budgeting starts with baby steps

I often talk to clients about the old Richard Dreyfuss/Bill Murray movie “What About Bob?” Dreyfuss plays a psychologist who writes a self-help book titled “Baby Steps.” Murray plays a severely neurotic man who heals himself following Dreyfuss’ program, taking baby steps, making small changes over a reasonable period of time.

I noted this when Sarah and Will came to my office after returning from a vacation with credit card debt, concerned about how to pay it off. They were determined to take control of their financial lives by creating a budget to limit spending and to actually save money for the future.

Not surprisingly, they were in a rush to get it all right — right now. I slowed them down. I urged them to take baby steps — to begin a careful, relatively painless process for tracking their spending without putting too much pressure on themselves. First, I said, figure out how much you’re spending each month.

Our next meeting was an eye-opener for them. They were spending no more than their income, except for the vacation credit card debt. But, they asked, if they spent all their income each month, how could they accumulate money for their long-term financial goals? They wanted to buy a home and have a family, and felt completely helpless to achieve these financial and life goals. They started tossing out ideas about how to reduce spending and become “profitable.”

Documenting your spending is a key first step. Keeping a record of your expenses can help identify areas of overspending. This enables you to decrease expenses and have money left over each month.

How do you trim expenses? Examine your largest expenses first. Yes, housing is a necessity. But how much you spend on a mortgage or rent is, at some point, up to you. You also need to eat, but how much are you spending on groceries? That often depends on factors like where you shop and how much of a premium you pay for convenience or luxury foods. How about dinners out? Lunches? Brunches? You can eat at less expensive places — or eat out less often.

Small things add up, too. Savings can come from low-hanging fruit such as trimming cable and cell phone services, movies in theaters, stops at Starbucks and finding less expensive wines.

You do have choices. It takes some research and a little soul-searching to scale down, but making sacrifices now can bring both peace of mind and rewards down the road.

After you cut your expenses, put your savings out of reach. Extra cash in your checking account looks awfully tempting. So, instead of leaving it there, pay yourself! Have your monthly “profit” automatically transferred to an account that’s harder to access than just through an ATM. This is an account you simply won’t withdraw from until specific needs present themselves — like a down payment on a house or a child’s tuition.

Online, FDIC-insured savings accounts offer higher interest rates than regular banks. You can have your online account automatically reach into your checking account each pay period and transfer the amount that’s comfortable for you into your savings.

Keep these tips in mind:

• Behavioral change is easiest to achieve in baby steps. The key is to keep it up.

• If you reach the budgeted amount of a category — movies or restaurants or clothing or books — any time before the month is over, stop spending on that category until the next month.

• Set up an online, FDIC-insured savings account and have your checking account debited automatically each month or pay period.

In essence, putting money into your savings account is like paying any other bill — only you’re paying yourself. And who deserves to get paid more than you?

One piece of this process that some people find difficult is finding practical ways to assess their spending on specific budget categories. We’ll discuss that in my next column.


Ira Fateman

Ira Fateman is a certified financial planner at SAS Financial Advisors in San Francisco. He can be reached at (415) 277-5955 or [email protected].