Budgeting

What Is a Budget?

The purpose of a budget is to give you control of your own money. With a budget, you actively decide what will be spent, and where your money can best be put to good use. There is nothing like the good feeling you get when you are in control of your money, rather than your activities and expenses controlling you.

What Is a Budget Plan?

A budget plan is a plan where you formally draw up a plan for expenditures for a given period of time, usually one year. The budget process includes all income sources and how that income will be allocated to expense categories. The biggest problem or hurdle with budget planning is to stick with it. Most families do not plan to fail, they fail to plan. A good plan will provide an excellent road map for success. A budget is just a tool and periodically, it needs to be fine tuned.

What Are Income Sources?

Do you know where your income is coming from and how much it is? Do you know what should be included as income? Here is a guideline regarding what should be included as income.

• Wages. This is your net pay from all paychecks. How do you get paid: weekly, bi-weekly (every two weeks), bi-monthly (twice a month) or monthly.
• Retirement income.
• Interest and investment income. Do not include this unless it is consistently the same yearly.
• Alimony. Do not include this unless you consistently receive it and there is no reason to believe you won't.
• Bonuses, a raise or overtime pay from your employer. Do not include these since they could be discontinued at anytime.
• Tips. Do not include this unless you can average the amount based on what you received in prior years.

Expenses include everything you spend. Do you know how much you are spending for categories such housing, transportation, food, clothing, entertainment, child care, medical expenses, charity and debt? Are you overspending for non essentials and thus not able to meet your necessary obligations?

Based on US News and World Report for budget allocations, the following is a guideline for how budget expenses should be allocated:

• 35% Housing - Includes: mortgage or rent, utilities, insurance, taxes and home maintenance.
• 20% Transportation - Includes: car payments, auto insurance, tag & license fees, maintenance, gasoline, tolls and parking.
• 28% Other - Includes: food (12), clothing (3), entertainment (5), child care, medical expenses (5) and charity (3).
• 15% Debt - Includes: student loans, retail installment contracts, credit cards, personal loans, tax debts, medical debts and alimony payments.
• 2% Savings - You should plan to save this amount throughout your working years, with a goal to increase it to 10%.

How does your spending compare to the guideline? Or is it impossible to determine because you have no idea where your money is going and how to even categorize it?

Here is a list that will help you categorize your expenses.

Fixed ExpensesThese are expenses you have little control over.

Utilities: Phone, disposal, water, electricity, gas heat, sewer

Home: Mortgage (usually includes insurance and property taxes) if not, insurance and property taxes

Health: Dental, health, life, and eye insurance (these items are usually covered by payroll deduction) if not, than add them here.

Income Taxes: Include Federal, state, local and FICA taxes only if you are self-employed.

Additional Outstanding Debt: student loans, retail installment contracts, credit cards, personal loans, medical debts and alimony payments.

Non-fixed Expenses

These are expenses you have more control over.

Food: Groceries, lunch, eating out, snacks, and date night.

Child support: Day care, babysitting and alimony payments (if it applies to you).

Transportation: Gasoline, maintenance, repairs, tolls, taxis, subway, fees and insurance premiums for all vehicles.

Debt Payments: Credit cards, Student loans, other loans.

Entertainment: Cable TV, Computer expense, software, hobbies, dues, subscriptions, videos, movies & admission fees, amusement parks, and vacations.

Clothing: Children and parents.

School: Books, supplies, fees and gym expenses.

Pet Expenses: Food, Grooming, board, Vet shots (if this applies to you).

Miscellaneous Items: Toiletries, household products, gifts, church, other donations, grooming (haircuts, make-up etc.) birthday and anniversary cards, children's allowance, spouse expense money (amount for each spouse to be spent by them for any reason without explanation) and insurance premiums (not covered by payroll deduction).

Savings: Emergency fund, savings for retirement or children's college fund and vacation fund.

If you are still unable to determine how you are spending your income, keep track of your expenses for a couple of months or until you can more accurately list your expenses.

Create Your Budget Plan

You are ready to create your monthly budget plan. Using budget software or a Microsoft Excel spreadsheet will aid the process. The budget plan will be divided into monthly buckets. Take your total planned income for the year and divide it by 12. Take your planned categorized expenses based on prior actual expenses and divide the categorized expenses by 12. Enter your total income in monthly columns; then enter your total expenses in monthly columns. Compare planned monthly income with planned monthly expenses. The total monthly expenses must not exceed the total monthly income amounts. If expenses exceed income, planned expenses must be decreased. A good budget plan should show planned expenses less than or equal to planned income.

Share Plan with Family

Sit down with the entire family and provide them copies of the proposed family budget plan. If your children are under the age of 5, do not include them unless they are receiving an allowance. Go over all the details of the plan. Provide information on what will be done with raises, bonuses, and overtime income if received during the year.

Tell the family that this is a plan and is not cast in stone. Indicate that adjustments may be made during the year. Answer all questions. Get each family members buy in. Then, STICK WITH YOUR PLAN. If any major situation should come up, hold another family conference and explain to them the situation.

If you are single, make a commitment to STICK WITH YOUR PLAN. Make adjustments as needed.

What To Do With Amounts in Budget Plan Not Spent For a Given Month?

This is a real good question. As your budget plan is followed throughout the year, there will be months in which you will not spend a planned expense. When this occurs, do not spend this money on something for which it was not designated. Most families have a tendency to spend the money on some other item. To prevent this from happening, keep the unspent planned expense amount in a savings account. When the need for paying the planned expense occurs, the money will be available to transfer from savings into the checking account.

Conclusion

If you follow the process above you will begin to take control of your expenses and have a road map for greater success. As you continue the process year after year, you will see new spending control trends. You will become successful in controlling your spending. Remember, most people do not plan to fail, they just fail to plan.