Budgeting: How To Prepare A Workable Plan

Budgeting: How To Prepare A Workable Plan

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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.

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.

Your Income

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:

Salary/wages
Income from self-employment
Retirement pay and/or government-source income (e.g., Social Security, disability, unemployment, annuity, and pension payments)
Interest and dividends
Alimony and/or child support
Rents and/or royalties
Income from trusts

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:

Taxes, federal, state and local
Mortgage or rent
Insurance, including medical, auto, homeowners, life, and other
Utilities
Automobiles (costs of operating minus insurance cost)
Dues and fees paid to associations and clubs

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:

Food
Clothing
Furniture and appliances
Entertainment
Gas, oil, and commuting costs
Medical care
Gifts
Vacations
Fees paid to accountants, lawyers, and other professionals

Estimate if you need to do so. 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 years 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: 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:

Column 1, labeled "Expense," will contain each of the items you listed under fixed and variable expenses.
Column 2, labeled "Last Year's Actual," will contain the monthly amounts you came up with for each fixed and variable expense.
Column 3, labeled "This Year's Budgeted," is where you will write in what you will allow yourself to spend on that item for the month. (It can, and probably will, differ from last year's actual expense).
Column 4, labeled "This Year's Actual," is where you will write in what you spend on that item for the month.
Column 5, labeled "Increase/Decrease," is where you will write in how much more--or less--you spent during that month than you had budgeted.

Arrange the items in whatever way are 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.

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.

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.

About the Author:
Laura is president and owner of 10 Key Solutions: Tax and Accounting Services. She has served in both the public and private sectors of accounting for over 25 years. Laura is an experienced and dedicated Accountant and Tax Preparer, with an attention for detail. Visit her blog for tax tips: http://www.10keysolutions.com/wordpress/.



Article Originally Published On: http://www.articlesnatch.com


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