Budgeting....A personal road-map
The New Year is quickly approaching, and many people will
make one of their resolutions to better control their finances in 2016. However, having a goal and being able to
achieve it are two very different things.
Know what you want…….Know how to get there
When attempting a new goal, it is always good to have a plan. Creating a simple budget creates a great road
map for how you will achieve your financial goals for the New Year. For many, the concept of sitting down and
creating a budget is a tiresome, frustrating, boring or even daunting, but I would
submit that budgeting, if you make it simple enough, is not only helpful, but
it can be fun!
Where do I start?
The first place that you need to start is by listing your gross
income. For many, your income will be the same from
month to month. If you make $40,000 per
year take 40000/12 for your monthly income. If it varies, budget to your lowest
month; this will ensure that you are not budgeting money that will not be
there.
The next step will be to remove all of your payroll
deductions. Take a look at your last pay
stub. They should all be listed. Subtract your deductions from your gross
income. This will give you your “take
home pay” or net income. Your take home pay
is what you have left to budget for the rest of the month. At this point you will have something that might
look like this.
|
January
|
|
|
Income
|
$ 3,333.33
|
|
Health Ins
|
$ (50.00)
|
|
401k
|
$ (333.00)
|
|
Taxes
|
$ (500.00)
|
|
Take Home
|
$ 2,450.33
|
Fixed Costs
The next thing to do is list all of your Fixed Costs. These are all of the bills that are
roughly the same each month. This might
include Rent (mortgage), Utilities, or even other bills you have signed up for
like pet insurance, gym memberships etc.
Some of these bills may change slightly from month to month like utility
bills. For a more accurate budget, look
at last year’s bills and average them over the year. For instance if you spent a total of $600 on
your electricity bills over the year, take 600/12 and you find your average
electricity bill was $50/month. In this
case some months might be under budget and some might be over budget, but by
the end of the year, it should total about the same amount. Once you have all of your Fixed Costs listed, you will take your “Take
Home Pay” less your “Fixed Cost”. This
is the amount you have left over after all of your current commitments. It may look something like this:
|
January
|
|
|
Income
|
$ 3,333.33
|
|
Health Ins
|
$ (50.00)
|
|
401k
|
$ (333.00)
|
|
Taxes
|
$ (500.00)
|
|
Take Home
|
$ 2,450.33
|
|
Fixed Cost
|
|
|
Rent
|
$ 500.00
|
|
Utility: Gas
|
$ 10.00
|
|
Utility: Elec
|
$ 50.00
|
|
Utility: Water
|
$ 30.00
|
|
Utility: Sew
|
$ 30.00
|
|
Utility: Cable
|
$ 50.00
|
|
Cell Phone
|
$ 50.00
|
|
NetFlix
|
$ 7.00
|
|
Total Fixed Cost
|
$ 727.00
|
|
Total After FC
|
$ 1,723.33
|
Look Out For Number One! (Saving and Goals)
The next step is to determine your financial goals for the
year. This might include saving for
retirement, setting aside your “rainy day fund”, saving for a down payment on a
house, or paying off a credit card. For
these types of goals, I always recommend finding a way to automate them. That way, you can “Set it and forget it”. For instance, you might set up an automatic
monthly transfer to your savings account or retirement account, or you may set
an automatic bill pay to your Mortgage or Credit Card Company. If you automate the process, you don’t have
to think about it each month. Of course,
I always promote having at least 6-12 months savings in an emergency fund, and
having all of your credit cards paid to a zero balance, but it takes time to
get there and setting a budget is a good way to start. You will list all of these items below your
fixed costs. It may look something like
this:
|
Transfers
|
|
|
Savings Transfer
|
$ 333.33
|
|
IRA Transfer
|
$ 333.33
|
|
Total TXFR
|
$ 666.67
|
|
Total After TXFR
|
$ 1,056.67
|
Irregular Expenses
The next category is irregular expenses or non-discretionary
expenses. These include expenses that
you have committed to like insurance premiums, car registration, etc, but it
can also include some of the more fun expenses like birthday gifts, or clothing
budget. Many times, people tend to
forget about these items until they come up, and this can create and undue
hardship at that time. One trick that I
suggest is taking these amounts and dividing them by 12. Then setup a separate month transfer into a
secondary checking account. That way,
when the expense comes up, the money is there to pay it. This section may look something like
this.
|
Non-Discretionary
Expenses
|
||
|
Car Registration
|
$ 16.67
|
(200/12)
|
|
Car Insurance
|
$ 66.67
|
(800/12
|
|
Car Maintenance
|
$ 20.00
|
|
|
Tax Payments
|
$ 33.33
|
(400/12)
|
|
Renter's Insurance
|
$ 25.00
|
(300/12)
|
|
Medical Exp
|
$ 20.00
|
|
|
Birthday Gifts
|
$ 16.67
|
(200/12)
|
|
Holiday Gifts
|
$ 16.67
|
(200/12)
|
|
Clothing
|
$ 40.00
|
|
|
Haircuts
|
$ 20.00
|
|
|
Animal Care
|
$ 10.00
|
|
|
Total Non-Disc Exp
|
$ 285.00
|
|
|
Total After Non-Disc Exp
|
$ 771.67
|
Now you know exactly how much you have left over at the end
of each month. This will lead us to our discretionary
expenses. These are the budget items that you have the most control over. If you are looking at the number left over
after all of your commitments and don’t feel comfortable with that number,
maybe it is time to start trimming some of your monthly commitments. For example: I haven’t been to the gym in 6 months. Do I really need a gym
membership? Or I am paying $200 a month for cable TV, could I find a package
that still has all the channels I want for $100 per month?
Discretionary Spending
This section is all about YOU! The key is setting a realistic budget. This section will include your groceries,
lunches out, fuel, and many of the other items you have control over on a month
to month basis. You have to be
realistic, but you also have to be willing to commit to the budget. Let’s say you want to eat out a couple more
times next month. You can choose to cut
a couple of restaurant visits this month to make sure the budget balances next
month. If you need to spend more on groceries
this month, you can cut back on some of your dinners out. The whole key to discretionary spending is
make sure that you are keeping it to the budgeted amount over the course of
time. Your discretionary budget might
look something like this.
|
Discretionary Exp
|
|
|
Fuel
|
$ 200.00
|
|
Allowance
|
$ 250.00
|
|
Groceries
|
$ 250.00
|
|
Shopping
|
$ 50.00
|
|
Misc
Exp
|
$ 21.67
|
|
Total Discretionary Exp
|
$ 771.67
|
|
Total After All Expenses
|
$ -
|
Wait!!!!!!!! My total after all expenses is $0. Yes, this is what we call zero dollar
budgeting. We account for every dollar
to make sure that we are not over spending.
If you get done with your REALISTIC discretionary expense and you still
have money left over, make sure that you have accounted for everything, and
then make some adjustments. I would
suggest you consider adding additional budget to one of your goal transfers so
that you can hit your goal even sooner than you had expected.
When you are all done, you might have a budget that looks
something like this:
|
January
|
||
|
Income
|
$ 3,333.33
|
|
|
Health Ins
|
$ (50.00)
|
|
|
401k
|
$ (333.00)
|
|
|
Taxes
|
$ (500.00)
|
|
|
Take Home
|
$ 2,450.33
|
|
|
Fixed Cost
|
||
|
Rent
|
$ 500.00
|
|
|
Utility: Gas
|
$ 10.00
|
|
|
Utility: Elec
|
$ 50.00
|
|
|
Utility: Water
|
$ 30.00
|
|
|
Utility: Sew
|
$ 30.00
|
|
|
Utility: Cable
|
$ 50.00
|
|
|
Cell Phone
|
$ 50.00
|
|
|
NetFlix
|
$ 7.00
|
|
|
Total Fixed Cost
|
$ 727.00
|
|
|
Total After FC
|
$ 1,723.33
|
|
|
Transfers
|
||
|
Savings Transfer
|
$ 333.33
|
|
|
IRA Transfer
|
$ 333.33
|
|
|
Total TXFR
|
$ 666.67
|
|
|
Total After TXFR
|
$ 1,056.67
|
|
|
Non-Discretionary
Expenses
|
||
|
Car Registration
|
$ 16.67
|
(200/12)
|
|
Car Insurance
|
$ 66.67
|
(800/12
|
|
Car Maintenance
|
$ 20.00
|
|
|
Tax Payments
|
$ 33.33
|
(400/12)
|
|
Renter's Insurance
|
$ 25.00
|
(300/12)
|
|
Medical Exp
|
$ 20.00
|
|
|
Birthday Gifts
|
$ 16.67
|
(200/12)
|
|
Holiday Gifts
|
$ 16.67
|
(200/12)
|
|
Clothing
|
$ 40.00
|
|
|
Haircuts
|
$ 20.00
|
|
|
Animal Care
|
$ 10.00
|
|
|
Total Non-Disc Exp
|
$ 285.00
|
|
|
Total After Non-Disc Exp
|
$ 771.67
|
|
|
Discretionary Exp
|
||
|
Fuel
|
$ 200.00
|
|
|
Allowance
|
$ 250.00
|
(eating out, movies, etc)
|
|
Groceries
|
$ 250.00
|
|
|
Shopping
|
$ 50.00
|
|
|
Misc Exp
|
$ 21.67
|
|
|
Total Discretionary Exp
|
$ 771.67
|
|
|
Total After All Expenses
|
$ -
|
How do I implement my budget?
I suggest creating a three bank account system. Generally I suggest keeping them all at the
same bank to make transferring funds easier, but some folks will suggest you
keep your savings account at a different bank.
Non-Discretionary Spending Account
I would suggest setting this account up as the account that
your paycheck goes into. From here, you
will transfer your monthly discretionary spending budget, and your savings account
transfer. All income goes into this account. This
is the account that you will use for your Fixed Cost budget items as well as
your Non-Discretionary spending items. Don’t
get a debit card for this account even if they offer it! Try to automate everything going out of this
account. If your bank offers automated
features (like automatic bill pay and Automatic Transfers) set them up so that
you don’t miss any of your commitments.
Discretionary Spending Account
This is where your monthly allotment of discretionary
spending money will go. I would suggest
making this a checking account that you have access to with a debit card. Using ONLY this account for your
discretionary spending will help keep you on budget and keep you from
overspending on these items that you have the most control over.
Emergency Fund (Savings Account)
I suggest having a MINIMUM of 6 months’ pay in your Emergency
Fund Account (in this scenario that would be $20,000). Notice I said minimum. Many people believe that number should be
closer to 12 months. This is the account
that you don’t touch except in the case of an emergency. You should set up an automatic transfer to
this account so that you don’t have to think about it. Once you have your 12 months’ pay set up in
this account, I recommend opening a second savings account to save for planned
purchases (cars, TV’s, Boats, dream vacation etc). Your goal should be to never use this
money.
I can’t seem to stay on track
Debit and Credit cards make it very easy for consumers to
spend. If you are having trouble staying
on track with your discretionary spending, make life simple. Ditch the credit card, debit card, etc. Each week, go to the bank and pull out the
amount of cash you have budgeted for that week.
When you get home, stick that cash into an envelope, and only take it
out when you are ready to use it. Only
use cash for the discretionary spending purchases. Once the money is gone, you are done spending
for the week. If there is money left
over at the end of the week. Put it back
into the envelope for use another day.
How do I track my budget?
There are a lot of different ways to track your budget. Quicken is a great took for helping you track
your spending and budgets, but it can take a lot of time and commitment in
order to do it right. There are several
free services like www.mint.com that will
help you track your budgets. They
connect automatically to your bank accounts and will even give you alerts when
you have over-spent. Lastly, there is
always the pen and paper method. Stick
on extra column on your budget sheet that says Actual. Once a week (or more) sit down and fill in
the actual amounts spent on each budget item.
Keep it in a binder throughout the year so that you can look back at
exactly how much you have spent.
