The Basics: Creating a Budget

Establishing and managing a personal household budget is an extremely important part of achieving your personal financial goals. A budget is also the most basic form of money management. Regardless of your income, a regularly managed budget will allow you to see your spending habits in relation to your income. This clarity will allow you to make changes to your spending habits in order to accumulate wealth at the pace necessary for you to accomplish the financial goals you set for yourself. Most people find that when they realize where they spend their money, saving or saving more is not that difficult.

There is no right or wrong way to budget your money so long as you remember that managing your finances is not a one-time activity but a lifelong commitment. The best budget is one that allows you to stay interested in keeping up with it. A simple budget process is described for you to use below.

What is a budget?

A budget is a written allocation of the financial resources you have available to you. Many people use software programs such as Quicken that can integrate the budgeting process with managing bank and credit card accounts. Other people track budgets on spreadsheets. It can be measured on any time frame basis such as daily, weekly, monthly, annually, and so on. Usually household budgets are prepared and tracked on a weekly or monthly basis. Some people even manage in accordance with daily expense allotments. However you choose to manage your budget manage it regularly. For the purposes of our illustration, we will use a monthly budget. An income and expense data worksheet is provided below.

Monthly Income Information: For the purposes of gathering data, it is recommended that you use a monthly format. You can prepare a budget from this information on a weekly or monthly basis depending on the level of discipline you want. Input the monthly information for each item in the list below. If necessary, use estimates in order to get the monthly amount.

Monthly Income:
Employer Income:
Salary / Wages
Bonuses / Incentives
Commissions
Investment Income:
Interest / Dividends
Rental Income
Loan Repayments
Business Income:
Self-Employment Draws
Partnership Draws
Royalties / License Fees
Retirement Income:
Social Security Income
Pension Benefits
Annuity Income
Retirement Account Withdrawals
Benefit/Insurance Related Income:
Unemployment Compensation
Disability Insurance Income
Long Term Care Insurance Income
Worker’s Compensation Income
Other Types of Income:
Reverse Mortgage Income
Alimony
Child Support
Court Settlement
Other
Other

TOTAL MONTHLY FAMILY INCOME = $_______________.


Monthly Expense Information: The expenses input here should be those that are actually paid each month. If you have expenses that are only paid a few times per year, add up the amounts and divide by twelve to get the average monthly amount.

Monthly Expenses:
Fixed Expenses:
Auto: Gas / Maintenance / Repairs
Alimony / Child Support
Commuting (other than Auto)
Child Care
Clothing
Education (other than Student Loans)
Groceries: Food / Household Supplies
Household Maintenance / Repairs
Insurance Premiums:
Auto
Disability
Home / Property
Life / Accident
Medical / Dental / Medicare
Other
Loan Payments:
Auto
Credit Cards / Charge Accounts
Home Equity
Student Loans
Other Loans
Medical / Dental Expenses not paid by insurance
Mortgage / Rent / HOA Dues
Personal Care (Hair / Cosmetics / etc.)
Pet Food / Care
Savings:
Taxable Savings / Investment Accounts
Retirement Plan Contributions (IRA / 401k / 403b / etc.)
Taxes:
Income / Federal / State / Local / Other
Property Tax – Real Estate / Personal
Telephone
Utilities:
Cable / Satellite TV
Electricity
Heating / Gas / Oil / Other
Water
Garbage Collection
Total Monthly Fixed Expenses:
Variable (Discretionary) Expenses:
Club Memberships
Dining (Restaurants)
Donations
Elective Medical Procedures
Entertainment (movies, plays, books, music, etc)
Gifts
Hobbies
Purchases: Cars and other big ticket items
Recreation
Subscriptions: Magazines / Newspapers / Books
Vacations
Other Items
Total Monthly Variable (Discretionary) Expenses

TOTAL MONTHLY EXPENSES - $_____________________.



TOTAL MONTHLY FAMILY INCOME $_______________

SUBTRACT TOTAL MONTHLY EXPENSES $_______________

NET MONTHLY CASH FLOW $_______________


Prepare your Budget:

With the information from above, you are now ready to prepare your budget. You can find find printable budget forms and budgeting software on the PF SAGE website here www.personalfinancesage.com. If you would prefer, email us and we will send you free Excel forms to use.

Analysis of your Budget:

With your personal information organized and your budget categories filled in, you have completed the easy part. The hard part is analyzing what you spend and how much you save. By completing the budget format above, you have already separated your expenses between needs (fixed expenses) and wants (variable or discretionary expenses). Keep in mind some fixed expenses such as automotive, clothing, personal care are “needs” up to a point and then they become luxury items. For instance if you own an expensive imported car, or designer clothes, you will need to be aware of the additional cost of owning these items over more basic brands.

You have money left over: Hopefully, after completing this exercise you will find your self with surplus money that you can begin to use for additional savings or for other goals. Make sure your expenses include any and all expense items to come in the coming months such as taxes or insurance premiums as you do not want to have a surplus in one month only to be short the next. If you have completed a month-to-month budget for the next year you should have accounted for these expenses.

You have a shortfall: If your net monthly cash flow is negative, there are only two things you can do: spend less or earn more. It may be helpful to compare your income to only your fixed expenses to help determine the effect of your cash flow picture from variable or discretionary expenses. In many cases, your discretionary expenses can be greatly reduced, giving you extra cash for debt repayment or savings. Depending on how much the monthly shortfall is you may only need to reduce some of your luxuries such as dining out less often or postponing a vacation. In other cases you may need to take a hard look at your fixed expenses, sell off assets you own, or move into a more affordable residence. Remember, a high priority should be placed on building emergency cash reserves if you don’t already have this available. Here are some things you may want to consider in balancing your budget:

Decrease Variable/Discretionary Expenses:

It should go without saying that if you are short each month on your budget, the first place you should look to cut is within the portion of your expenses that are discretionary. These expenses include excessive automotive costs, excessive designer clothing expenses, club memberships, restaurant dining, entertainment, recreation, hobbies, big-ticket purchase, unnecessary home modifications, vacations. The severity of the shortfall will determine the level of cuts you have to make to these types of expenses. After you have taken measures to reduce and eliminate certain discretionary expenses you should take a close look at what you may be able to do to reduce your fixed expenses.

Decrease Fixed Expenses:

While it is essential that you continue to pay and not delay the payment of your basic necessary fixed expenses, there may be ways to decrease these amounts.

Mortgage - Look around for a home mortgage with more favorable terms and lower monthly payments. BEWARE: make sure you are fully aware of the types of mortgage loans you are looking at. Variable rate, balloon, interest only, and negative amortization loans, to name a few, can be dangerous to your financial health. While they might make sense for your particular situation, be sure you know of all of the risks associated with such mortgage products before signing on the dotted line.

Rental - If you rent the space where you live, shop around for a cheaper place. In this day and age, you may want to consider asking your landlord for a rate break. You might be surprised at the positive response in order to keep you as a tenant.

Food – Limit your food purchases to the necessities. Avoid gourmet food stores and buy in bulk when possible. Buy sale items and use coupons when available. You will be surprised at how much of a difference this can make in your monthly grocery bill.

Automotive - First of all look at the car you drive. Should you really afford it? Can you live with one less exepnsive to help you accomplish other, more important, goals? If you are upside down on the value of the car versus the loan balance, don't perpetuate it by buying another car you can't afford. Have a plan and get out cycle as quickly as possible. Keep your vehicles maintenance history up to date. Make sure your tires are always at the recommended limit. Low tire pressure, other than the excessive wear and tear, can decrease your average gas mileage. Look into other transit options such as the subway, bus, and carpool. Check to see if your employer offers reimbursement for these other transit options.

Clothing – Purchase clothes that you actually need and not more. Clothing is one of those items that can easily blow any budget. Be aware of how much you need and how much you spend on what you need. Shop for sales and clearance items when possible. Buy your clothing needs at times where they are considered off-season. You can almost always find these items on sale at these times. Even better, buy clothes at donation centers such as Goodwill or Amvets. You would be surprised at the quality clothes you can get for next to nothing.

Telephone – If you have a home telephone and a mobile phone, consider eliminating one of them. If you need to keep the mobile phone, do you need to also have a home phone? Many people are finding that the redundancy of having a mobile phone and a home phone is unnecessary. Keep in mind, that if you eliminate your home phone, you are dependent on the mobile service quality in your area. You may also want to consider the various rates from the competing providers. You may be able to lower your monthly cost by switching providers.

Utilities – Proper home maintenance on your central air system such as clean air filters, vents, weather striping around doors and windows can make a big difference in your monthly electricity bill. Have your local utility company inspect your house if the free service is provided (many will offer this free service once per year). When was the last time you looked at your television cable or sattelite bill? If you are like most people these days you have "bundled" package that includes your television reception, internet service, and telephone. Bundled packages usually mean that they charge you a bundle. Look at the details and pressure your provider to lower the cost. Do away with unnecessary additions to your service such as multiple reception boxes and channels that you don't use.

Insurance – Be sure you have the appropriate insurance coverage for your personal situation. This is extremely important. Speak to your insurance professional. One great source for insurance information is AAA (the Auto Club). Once you have determined the appropriate coverage, then should shop around for the most competitive rates. KEY POINT - Shop around! With the interent this is a no brainer.

Increase Income:

I save an evaluation of income for last since I think many people will think of these things first before coming to the realization that what they really need to do is spend less. Nevertheless, here are a couple of ideas.

- Sale of property such as stocks, bonds, personal property items and other items to raise cash. You may be able to use this money to reduce high interest credit card debt, or provide some time to reestablish a more affordable lifestyle.

- Take on a job that pays more.

- Earn more by taking on a second job or have others in your family work.

Tracking Your Expenses:

Preparing your budget is a great start to managing your personal finances but it is just the beginning. In order for your plan to be successful, you need to track your expenses and then compare them with your budgeted expectations. Only then can you evaluate where reality separated from your expectations.

One of the best solutions for tracking expenses is by using financial software such as Quicken. Quicken can be set up to automatically download all banking, credit card, and investment transactions from hundreds of different financial institutions. Programs such as this one offer a wealth of planning information and resources. You can find links to various software programs at www.personalfinancesage.com.

If you are less interested in automating your personal financial management on a computer you could use a budget template and input your expenses manually throughout the month. Either way, be sure to be diligent in updating your information regularly otherwise it will be difficult to keep track of how well you are keeping to your budget.

Good luck with it!