How do I prepare and use a budget?
Now that the holidays are behind you, you may find that you spent more than you planned to. While this is not unusual for many people at this time of year, spending beyond your means on a consistent basis can make it difficult to achieve your financial goals and, at worst, be financially devastating. The good news is that a realistic budget that is properly maintained will put you in the driver's seat on the road to financial prosperity.
Whether you are a millionaire, living paycheque to paycheque or somewhere in between, having a solid realistic budget is a must in order to make the most of your income. While the task of setting up and sticking to a budget may seem daunting at first, the real pain is only at the beginning and you will find that keeping track of your budget will eventually become second nature to you.
Before you get started
Before you get started on a budget, here are a few basic principles you should follow:
- Be realistic. The old adage "Garbage in, garbage out" can definitely relate to your budget if you use unrealistic numbers. Make sure that you use dependable sources when you gather your financial information and try to keep your "guesstimating" to a minimum.
- Start today. Another old adage is "There is no time like the present." Carve out a little time from your busy schedule to grab the necessary documents and just do it! Getting started is definitely the hardest part.
- Utilize technology. With so many computer programs out there to help you keep track of your finances, there's almost no excuse not to budget. Quicken and Microsoft Money are good, inexpensive financial programs that are user-friendly and can save you lots of time. An added benefit is that many of these programs have automatic budget-creation features, making it even easier for you to build your budget and continually track your progress.
- Don't be afraid to ask for help. If you feel that the budgeting task is a bit overwhelming to you or you feel that you need a greater level of assistance, contact an experienced financial professional. Whether you have a simple question regarding taxes or feel you need a more formal comprehensive financial plan, you shouldn't be afraid to seek the help that you need.
Setting up the budget
Step 1: Determine spendable monthly income. The first step to building your budget is to figure out how much money you have to spend each month. If you are primarily a wage earner, this will most likely be your net salary (e.g., after taxes and other deductions), as well as interest and dividends from investments such as money market accounts and stocks. If you have your own business, your spendable income may come mostly from profits from that business.
Once you have come up with a good annual net number, divide that number by 12. This is the amount you will have each month to meet your monthly expenditures.
Step 2: Calculate monthly expenditures. If you use a computer program to record and track your finances, this task won't be that difficult. However, if you do everything manually, your first step will be to gather all of your records from the last twelve months including pay stubs, cancelled checks, bank statements, and credit card statements. Once you have all of this data gathered, it is time to separate your expenditures into two categories: fixed and variable.
Fixed: These types of expenditures are consistent in nature and generally are difficult to adjust. They include:
- Interest on notes
- Loan repayments
Variable: These types of expenditures vary in amount from month to month and are generally easier to adjust than fixed expenses. They include:
- Deposits to savings/investments
- Home repairs
- Car repairs
- Cleaning/personal care
- Charitable contributions
- Household supplies
Step 3: Adjust monthly expenditures to meet spendable monthly income. Once you've determined your monthly spendable income and expenditures, a quick calculation will tell you if you need to adjust your spending in any way.
If your expenditures exceed your monthly spendable income, you will need to look at how you can reduce your expenses to eliminate the deficit. Since fixed expenses are difficult to cut back on, you should first focus on cutting some of the "fat" from your list of variable expenses. Focus on expenditures that are considered "luxury" items such as entertainment, vacations and your morning lattes. It probably would be less painful to cut a little from many different places than an entire category.
If your income exceeds your monthly expenditures, congratulations! But you're not done. You must adjust your budget to take into account where that extra money will go (e.g., additional savings deposits, investments, or even more vacations!). The goal is to continually balance your budget to make the most of your money and make it easier to achieve your financial goals. If your budget indicates that you will have additional income to invest, investing this money as soon as possible will reward you with an even greater monthly spendable income in the future.
Even the best-planned budget is worthless if it is not implemented properly. In order to keep on track, make sure you:
- Start today. Now that your budget is prepared, it's time to put it in place -- starting right now. Procrastination won't help you achieve your financial goals but a proactive, go-get-'em attitude will.
- Get support if you need it. Once you embark on your "financial diet", you may occasionally fall off the budget wagon. Enlist friends or family members to "keep you honest" if they see you spending outside of your budget.
- Review your budget on a regular basis. An out-of-date budget is not going to help you at all and could in fact hurt you. Did you get a raise or start a new job with a different salary? Did the rate on your adjustable mortgage decrease? Did the cable company raise their rates? All items in your budget should be reviewed regularly and any significant changes should be noted in your budget for possible adjustment.
It is obvious that with a realistic budget and some financial willpower, you will be on the road to good financial health. If you need any assistance as you set up your budget, please feel free to contact the office for additional guidance.
The information presented in this document is of a general nature only and should not be relied upon to replace professional advice. Before acting on this information, talk with a professional advisor as laws and regulations are constantly changing. Readers accept full responsibility; no document found here is a substitute for a consultation.