I see far too many times where a template or boiler plate is used incorrectly for a household budget. Taking some form and putting your numbers in and getting results is not a budget. It’s just posting what you made and how you spent it. This is not a good idea to start with.
Start by using your “net” income first or average your income over the past twelve months. If you have commission you will need to average it, if you have direct base salary (exclude bonuses) add the net and divide by twelve months. This will give you the first line item in your budget, call it “Revenue”. Now you have to do some research, you have to look at what was spent in the last year.
The basic budget will include:
• Rent/Mortgage
• Insurance (Does not include contributions at work)
• Supplies (gas, water, heating and air conditioning)
• Phone
• Internet or cable package
• Food/Hygiene/Household products
• Clothes
• Education or training expenses
• Automatic payments
• Transportation costs (if you take a bus or train to work or shopping)
• Repair and maintenance of automobiles
• Gasoline
• Credit cards/Other debts
• Savings
You will now have the basic structure of these elements, but there is still work to be done.
You will need to design a format for your budget, five columns will be needed. They are the line item in the first column, title that column Item. The second column will be Budget Amount, the next column will be Percentage, the next column will be Actual, and the final column will be Variation.
The first two columns of budget and percentage is what we will work on first. Later you will begin to fill in the balance of the columns.
The first thing is to put savings at the top of your list. If you have savings, take a look and see how much is currently there. Just take into account what you saved in the last year. Take your average annual savings and divide it by your net income. This will give you a savings percentage against your net income.
Example: Savings $1200.00 / Net Income $35,000.00 = 3.4% then divided by twelve months.
Don’t get stuck on this now, just take the figure and place it as it is. We’ll figure it out later.
Under the Budget heading you will have this so far:
budget percentage
Income 2,920 100%
Savings 100 3.4%
The next thing to do is post your monthly rent/mortgage payment. If you are paying a mortgage, you must break it down into principal and interest.
Income 800 27.3% gold
Mortgage 400 13.7%
Interest 600 21.0%
In his opinion, it will make a big difference if you know the breakdown of the mortgage and interest, in addition to any other charges.
I’m just showing here how to calculate your opening budget. At the end of the mortgage, you’ll obviously include property taxes and any other maintenance data you’ve collected from the previous year. All expense items are important.
Now, for those who tithe, you have to put that in the budget as well. There are arguments as to whether or not the allowance should be made from gross salary or net salary. Well, that depends on what your budget and conscience sits on and feels comfortable with. Most churches argue that you should be titled out of the gross, but if that’s too much and hurts your financial future, then maybe most will come from your network.
On the other hand, in some cases neither situation is sustainable. You have to go to what your financial future dictates and allows. Some people can give a lot more and others ten or twenty dollars might be all they can really give. This is always a personal choice.
So now let’s get back to the budget allocation. Let’s say you saved only fifty dollars in the month of January, it will show a fifty dollar variance. Now fifty dollars just doesn’t go away, that money was spent somewhere. If you look at your entertainment article, you’ll find that you spent fifty dollars more than you should.
Item Budget Percentage Actual Variation
Savings 100.00 3.40 50.00 (50.00)
Entertainment 25.00 0.08 75.00 50.00
This is where you would start, now if you have more expenses than income, that would generate a percentage above one hundred percent. Now if you have the situation that reflects more than 100 percent, the only way to correct that is to cut costs from other areas. Maybe you want to reduce your clothing costs. You could look at your credit card payments and pay a little more to lower the minimum charges.
You have options once you understand your spending pattern. In some cases, you realize that you shouldn’t have your credit card with you every time you leave the house. A true test of impulse buying is to take a look around your house and see if you spent money on something you don’t use regularly or never. If this is so, then your only option is to hide the card or tear it up and not use it, until your momentum rests. If you also look around and can’t figure out where you spent all that money, take a look at your statements and break them down.
This, of course, is just a view in the rearview mirror. This is money that has already been spent. The best part is that you can now look at the current month and collect that data and see how it compares to your past. Once you see what you’ve already averaged over the past year, now wait until the end of next month and post that to the budget and see what you get.
One thing to realize a negative can be good or bad. In the example above, you will notice that the savings have decreased. That’s not good; one is spending money from savings elsewhere. From a quick glance, you can see that entertainment expenses have increased. This type of spending can and will have a severe impact on your savings and should raise a red flag.
Certain expenses will vary a little each month and seasonally such as utilities due to climate change. You can save money on certain items, like phones or food, by using your phone less or using coupons to buy groceries, etc. If you subscribe to many different magazines, you can choose just one or two and forget about the rest.
One has to take a good look at all spending patterns to see if there are some things that can be avoided or eliminated altogether. Now, we’re taking the time to figure out how to save money on these different items and implement the new spending plan.
Once that’s done, we can straighten what was headed for the disaster zone to something better. Let’s say we took action, and by making just a few small changes, we now look better.
With some discipline and future perspective, we can change from where we are to where we are going. One word of warning, don’t try to conquer Rome in one day, that kind of strategy usually never works.
To create a future budget, you will need to master the current budget. We start with a budget based on last year. The next step is to see where you are in a current month. Then, by comparing the two, you draft your plan to turn your budget into a surplus.
Once you have your monthly budget under control, you can now look ahead and set aside for other things like a new car, investments, a down payment on a new house, retirement, a better apartment, etc.
Saving gives purchasing power. Now we are seeing what happens month by month. We need to look at the next year or years as a whole as well. You will need to determine how much you want to see in your savings at the end of the year. You may decide that you want to double your car payment for a few months to speed up paying off that note, which in turn will save you money. You may want to look at some other financing that will allow you to pay off any liens at a lower interest rate.
This budget is just an example, it could be that you have so much debt that your main goal is to pay off the debt as quickly as possible. Facing where you are financially is very important. If you don’t know where you stand, you will fail for sure. By doing this each month, you will know where you are and will be in control of the present and the future.
I hope this family budget series has sparked some personal fiscal responsibility. Futures are not built or designed in a day, but are, in fact, incremental.