lean budgetThe sluggish economy is still a cloud over many of our heads. And for those still unemployed, paying a mortgage on an underwater house or desperate to get out from under credit card debt, a lean budget may be more than just temporary.

If you're trying to make money stretch further in 2011, here are five tips and strategies.

1. Define Your Situation

You can't create a realistic budget unless you know exactly how much you're bringing in and spending each month, which is why Wayne Copelin, a certified financial planner and president of Copelin Financial Advisors in Sugar Land, Tex., says that everyone should create "a cash flow statement, which will demonstrate where income is going."

Granted, this is easier said than done, and nobody's saying you need to be so specific that you break down how much you spend on eggs each year. But Copelin cites the often-used example of "stopping at Starbucks on the way to work every morning and paying cash for a latte." Over time, that can add up.

"For example," says Copelin, "if you buy two coffee-shop lattes, one in the morning on the way to work and one after lunch, for 25 years, you'll spend about $1,750 per year, assuming the price of lattes doesn't increase with inflation. If you invested that same amount at a modest rate of return, at the end of 25 years, you'd have about $100,000 of 'latte money.' "

But back to that cash-flow statement. It can be hard to actually add everything up -- I know from my pre-bankruptcy days when I had thousands of dollars of credit card debt -- because sometimes you're spending more than you're taking in, and who wants to really face up to that? But if you don't, it'll catch up to you (trust me on this), and if you want to get control of your finances, you have to know what you're spending every month.

Copelin suggests going back and looking at your bank records for the past three months (since an entire year is probably a little too ambitious) and trying to reconstruct just how you've been spending. Or maybe you should just look at October and November, if December was full of holiday gift purchases.

2. Use Credit Cards Sparingly

Once you know how much you're spending, stop spending so much! A smart place to start would be with your credit cards.

"If you're on a limited budget, keeping track of your credit card expenses is essential," says Beverly Blair Harzog, a credit card adviser for Credit.com. "Only use your credit cards if you know you can pay them off when the monthly statement arrives. And if you're a savvy cardholder and you pay off your credit card debt monthly, use cash-back rewards cards to help you pay for everyday expenses."

And if you're going to use your cards for cash-back rewards, Harzog adds, "Be sure you know what the program details are, so you can maximize your cash-back benefits.

"For instance, some cards have rotating categories, such as groceries and gas. Even small amounts of cash rewards [in those areas] can help you out when your budget is tight."

On the other hand, if your budget is really tight, perilous even, Harzog would agree that unless it's an emergency, don't touch your cards. There's tight, and there's tight. And using the credit card for a non-crucial expense, when you barely have money to cover your basic expenses, is going to create a financial sinkhole.

3. Beware of 'Bargains'

"Never, ever fall for the 'It was too good a deal to pass up' rationalization," Copelin advises. "All bargains can be passed up."

He's right, with one exception: If you are planning to buy the item anyway, snap it up on sale. But if it isn't in your budget and not something you're planning to purchase? Run far, far away.

4. Pay Crucial Bills First

It seems like basic information, but in the depths of the recession, there were a lot of people paying credit card bills before mortgage payments. I understand the reasoning: Knowing you'll need your credit card, you don't want that source of funding to dry up. But if you have to choose between your mortgage and credit card, there's really no choice. The mortgage should win every time.

That's not just my opinion. I've never met a personal finance expert who would suggest anything less: You pay the essentials before anything else. Food and medicine come first, then housing, then utilities, then your car. Then you can start thinking about that credit card. It's true that if you ignore your credit card bills, your financial situation will only get worse, but what if your electricity is turned off or if the bank threatens to remove you from your home?

5. Pay Yourself Last

I'm going to go against the grain here, partly because every personal finance expert worth their salt says pay yourself first (and because I like bucking the system), but I also think I have a solid argument.

"Pay yourself first" means that when you get your paycheck, you should always sock some money away in savings for a rainy day. That's unimpeachable wisdom. But when money is truly tight and you're struggling to pay your bills, it's difficult to follow. If your water bill is four days past the disconnection date, you're going to find it hard to put something away for later.

My advice would be to pay your most critical bills first--including a run to the grocery store--then see what's left for a daily budget. If, after paying your bills, you have $500 for the next two weeks, your daily budget would be $35 a day ($500 divided by 14). If you have only $300 left, your daily budget would be $21 a day.

If you can stay on budget, you'll make it to your next paycheck. Even better, if you manage to spend less, you'll have something left over. And that's when you put the money in a savings account. And if you can't stomach putting it all away, sock away half.

So you've paid yourself last, but who cares? You've got money in the bank, and come payday you might be able to do it again.

Geoff Williams is a frequent contributor to WalletPop. He is also the co-author of Living Well With Bad Credit.


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