How To Prepare A Workable Plan
An essential component of your financial plan is a budget. It forces you to monitor your spending, enabling you to focus on which items might be reduced so that your can accumulate funds for retirement, education or other needs. Here is a guide to effectively organizing and keeping a check on your expenses.
TABLE OF CONTENTS
Step 1: Analyze Your Income And Expenses
Step 2: Set Budgeting Goals
Step 3: Create Your Budget
Step 4: Review Your Adherence To The Budget
Many people find it impossible to save money without a budget, which is simply a plan for spending and saving money. A budget can accomplish many goals:
This Financial Guide shows you how to develop and put yourself on a budget, thereby gaining the positive effects of proper cash flow timing and money management. If you need any help in preparing your budget, contact your financial advisor.
Note: If you have a good grasp of your cash inflows and outflows and have your spending under control, there may be no need to prepare the budget suggested here. It is intended for people who need to rein in their spending or have no idea of the actual impact of their spending pattern.
Note: Various personal-finance computer programs allow you to develop a budget. If you have such a program, simply follow the guidelines that the software gives you, and use the information contained in this Financial Guide as an overall guide.
STEP 1: ANALYZE YOUR INCOME AND EXPENSES
The first thing you need to do is to look over the past year's worth of income and spending. This "cash-flow analysis" will lay the groundwork for the budget you will create. You'll need your checkbook, your credit card statements (if available), and your most recent tax return. This will give your sufficient data to analyze your spending and income for the past year.
Using ledger paper or notebook paper, list your income for a one-year period, and break down the amounts monthly and yearly. Include the following types of income:
Your income analysis might look something like this:
Your Fixed Expenses
Add up the expenses that generally do not vary much from month to month, and break them down monthly and yearly. Make sure you include the following categories, whether or not they're immediately evident from the past year's bills:
Where the amounts vary by month, as with a phone bill, add up what you paid for the year and divide by twelve to get the monthly amount. Divide bills that you pay yearly or quarterly by 12 to arrive at a monthly amount. This will help you to arrive at a more functional budget. If you have large credit card debt, indicate the amounts you actually paid, not the minimum monthly payments.
Your Variable Expenses
Next, add up your variable expenses for the previous one-year period, using your checkbook and credit card statements. Be sure to include the following:
Estimate if you need to do so. Here's what your variable expenses might look like:
|Gifts For Weddings, Birthdays, etc.||$42||$504|
|Movies, Theatre, Restaurants||$80||$960|
|Gas, Oil, Car Repair||$43||$516|
You'll be able to tell whether you're overlooking any variable expenses by subtracting the total yearly amount you arrive at for variable and fixed expenses from your yearly income figure. If this amount is the amount you put away in savings for the previous year, then you can be pretty certain that you've included all of your variable expenses. If there is a large gap between income minus expenses and the amount you saved, do some digging to try to find where the extra money went.
STEP 2: SET BUDGETING GOALS
Your budget should tie in with your financial planning goals. For instance, you may have done some work on your retirement plan, and decided that you needed to save $20,000 per year for the next ten years to accumulate the nest egg you want for retirement.
Or you may be saving for a new home, and determined to save $5,000 per year for the next three years to come up with a down payment.
You may also want to reduce credit card debt or pay down a mortgage with your increased savings.
In this step, decide how much you want to put away each year and what you will do with the savings. Your saving goals will depend on the above-mentioned financial planning goals, as well as on your age and income level.
If you want to save more than you have been saving, then you'll need to cut down on optional expenditures. To do this, you'll enter an amount under "budgeted amount" that is less than "last year's actual."
TIP: You should review your budget each year to make it fit in with your financial goals, both long-term and short-term.
STEP 3: CREATE YOUR BUDGET
Now it's time to actually create a budget. One simple approach is to use one sheet of paper for each month of the year. Use ledger paper or use 8-1/2 by 11" paper used in "landscape" format (used horizontally instead of vertically).
Note: As we stated before, if you have a computer program that will formulate a budget for you, use that, as it will be more convenient than writing up a budget by hand. But read through our guidelines anyway to get a grasp of the concepts involved.
Each sheet of paper should be headed by the name of the month. Once you've come up with January's version, you can photocopy that 11 times, since each month's version will be the same.
Each month's budget sheet might have five columns:
Here is a partial view (showing just two expenses) of what your monthly budget might look like:
|Expense||Last Year's Actual||This Year's Budgeted||This Year's Actual||Over/(Under) Budget|
Arrange the items in whatever way is convenient for you. Make your budget easy to use; this will help ensure that you use it. If you prefer to categorize your expenses in an orderly way (fixed vs. variable or optional vs. mandatory), then do so. If you prefer to categorize them in the order in which they come up during the month, or by the manner in which they are paid (cash, check, or credit card), then do so.
It takes discipline to record each amount in your budget as you pay it, but the discipline will pay off at the end of the year, when you will have a clear picture of your spending.
TIP: Keep receipts for cash payments until you are able to record expenditures in your budget.
TIP: Don't try to track every penny; instead, maintain a category called "petty cash" or "miscellaneous expenses" to cover spending cash that does not go for categorized items. This will cover cash that you withdraw from your checking account, but do not keep track of. Allow yourself a reasonable budgeted amount for this category.
STEP 4: REVIEW YOUR ADHERENCE TO THE BUDGET
At the end of each month, and then at the end of the year, look at your monthly totals to see whether you've under- or overspent your budgeted amounts. Performing a monthly and yearly review will help you to set or revise goals for next year.
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