Budgeting

Many people find that, during times of economic recession, managing their money can be much more difficult than it previously had been. The housing market, for example, has been in a great deal of trouble because of people being unable to cover their mortgages or pay for their newly purchased homes causing massive foreclosures. Problems like this can be easily avoided by using proper budgeting and money managing techniques that are simple enough for everyone to practice in their daily lives.

Budgeting is a concept very familiar to almost all business institutions, but it can also be applied to people's everyday lives. The first thing to consider is a budgeted income statement . What is an income statement? It is a financial document that allows a person to determine their net income. A person who makes $100,000 a year does not have a net income of $100,000. In order to determine a household's net income, all expenses (for example, groceries and other such commodities that will need to be purchased during the year) that can be foreseen are deducted from the total earnings. Earnings can be determined through a couple different ways for a household. Earnings can be attained through either a person's salary, or if they collect unemployment and government aid, or if they work an hourly wage. If a person earns a salary, they simply add the net pay for each month together to arrive at the net earnings (or total net pay received) OR look at they're last paycheck for the previous year, and it should have a category for you're net pay of the entire. It is important not to confuse gross pay and net pay. Gross pay will add up to the total amount of the salary, whereas net pay will tell you how much money you received once taxes were taken out. If a person uses gross pay instead of net pay, their net income will be overstated because it assumes the household attained revenues that it did not actually receive. For example, if a person has a gross pay of $100,000 and a net pay of $80,000 and unwittingly uses their gross pay instead of net pay, the income statement will show $20,000 (100,000 - 80,000) of net income that they never actually received, and thus can lead them into spending money they don't have and incurring debt expenses for future periods. A person who receives unemployment or some sort of government aid (such as disability) also simply has to calculate net earnings in much the same way as someone who earns a salary. A person who works for an hourly wage should go through their previous years pay stubs and determine their estimated net earnings by figuring out the average hours worked per week and multiplying that by number of weeks per year they work and then multiplying by the dollar amount that they are paid per hour. It is important to note that working overtime or less hours than budgeted must be taken into consideration. This will be recorded not in the forecasted budget, but in the actual budget (as in the actual earnings less the actual expenses incurred to reach the actual net income).

Once the net earnings have been determined, the next thing to be figured out is the net expenses that will be incurred during the period. Some common expenses are rent expense, any liabilities paid on things such as car payments or home payments, groceries expense and utilities expense. To determine expenses associated with paying rent or paying off a home or car, simply take how much money you send out each month for that item, and multiply it by 12 months in a year. Not all expenses will be the same for every month, which is why expenses can be viewed as one of two types: fixed expenses and variable expenses. Fixed expenses are easily calculated by taking a monthly expense and multiplying by 12 months in a year or a weekly expense and multiplying by 52 weeks in a year. Variable expenses take a little more attention. A good example of a variable expense is a heating or water bill, which increases according to a cost driver (such as how long you use the heater each month, or how much water is used). Although technically many variable costs can be broken down into a fixed and variable component (I.e. if you used no electricity at all for an entire month, the electric company would still charge you a minimum fee), it is not necessarily imperative to take into consideration in your budget. The perhaps simplest way to determine the budgeted variable expenses is to look at expenses incurred in previous years and then take into consideration any rate increases that may have occurred. For example, if the sum of the monthly electric bills for the previous year were $800 and there were no changes in the cost of electricity, then the budgeted expense for the next year could be set at $800 as well. Another thing to be kept in mind is the ability to lower variable expenses by taking shorter showers or turning lights out when you leave the room or using less heat.

Once the budgeted earnings have been determined, and the budgeted expenses have also been determined, it's time to analyze the budgeted net income. Subtract the budgeted expenses from the budgeted earnings to determine the budgeted net income. For example, a man who has $80,000 of net pay budgeted and $50,000 in expenses budgeted will have $30,000 of budgeted net income. What exactly does that mean? That means the man will have $30,000 of cash by the end of the year to use as he sees fit, whether it is to pay off unforeseen expenses such as those incurred if a pipe bursts in the winter and you need to call a plumber, or the transmission blows in your car and costs $1,000 to replace. Along with the budgeted amounts, the actual amounts should be kept track of during the year so that at the end of the year an actual income statement can be created to determine how much money will be available for the next years budget. If the actual earnings are less than the actual expenses, then it is important to go through your finances and activities to determine why and correct it for the following year. Any money borrowed that is not paid off during the year it was borrowed in will have to considered an expense of the next year's budget. For example, if a person had to take out a $12,000 loan at 6% annual interest, you would take the interest (12,000 x .06) + the principle (12,000) to arrive a total cost of $12,720 which will become an expense for future years. Proper budgeting will allow a household to have a general idea of where they stand financially and will allow them to more readily deal with any financial problems and not have to spend sleepless nights worrying about whether or not they are going to be able to survive.