Budget Planning

Do you have any idea where your money is going? Are you living from paycheck to paycheck? Do you desire to have control over your finances? You came to the right place. Do you know how to formulate a budget plan? If you are like most individuals you probably do not or have not thought about it because you don't have the time. This article will supply you with the tools in which you can begin to start formulating your budget plan. If you are interested, you can click on the links below for resources that will assist you in the budget planning process.

Here is a link to another article which will provide information on How Money Works. Great information on the Rule of 72 and it's impact on investments.

What Is a Budget?

The purpose of a budget is to give you control of your own money. With a budget, you actively decide what will be spent, and where your money can best be put to good use. There's nothing like the good feeling you get when you are in control of your money, rather than your activities and expenses controlling you.

What Is a Budget Plan?

A budget plan is a plan where you formally draw up a plan for expenditures for a given period of time, usually one year. The budget process includes all income sources and how that income will be allocated to expense categories. The biggest problem or hurdle with budget planning is to stick with it. Most families don't plan to fail, they fail to plan. A good plan will provide an excellent roadmap for success.

A budget is just a tool and periodically, it needs to be fine tuned.


What Are Income Sources?

Do you know where your income is coming from and how much it is? Do you know what should be included as income? Here is a guideline regarding what should be included as income:

  • Wages. This is your net pay from all paychecks. How do you get paid: Weekly, bi-weekly (every two weeks), bi-monthly (twice a month) or monthly?
  • Retirement Income. The sources are: pension, social security, IRA's, 401k and annuity checks.
  • Interest and investment income. If possible, do not use this income source. Let the accounts grow by reinvesting the interest, dividends, or capital gains that these accounts may earn during the year.
  • Alimony. Do not include this amount in your budget. If you should receive it, make plans in your budget as to where it should go. Do not include it for regular expenses. This source may not come on a consistent basis and could create a huge hole in your plan if not received.
  • Bonuses, raises or overtime pay. Do not include this source of income because they can be discontinued at any time. Make plans on what to do with the income in the event you should receive it.
  • Tips. This is not a regular source of income since it varies daily. Budget only the average amount received in your plan.

    What Are Expenses?

    Expenses include everything you spend. Do you know how much you are spending for categories such housing, transportation, food, clothing, entertainment, child care, medical expenses, charity and debt? Are you overspending for non essentials and thus not able to meet your necessary obligations? 

    Based on US News and World Report for budget allocations, the following is a guideline for how budget expenses should be allocated:

    • 35% Housing - (Includes: mortgage or rent, utilities, insurance, taxes and home maintenance)
    • 20% Transportation - (Includes: car payments, auto insurance, tag & license fees, maintenance, gasoline, tolls and parking)
    • 20% Other - (Includes food (12), clothing (3), entertainment (5), child care, medical expens3es (5) and charity)
    • 15% Debt - (Includes: student loans, retail installment contracts, credit cards, personal loans, tax debts, medical debts and alimony payments)
    • 10% Savings - You should plan to save throughout your working years. To retire comfortably, try to increase the percentage up to 15%.
    How does your spending compare to the guideline?  Or is it impossible to determine because you have no idea where your money is going and how to even categorize it.

    Here is a list that will help you categorize your expenses. 

    Fixed Expenses

    These are expenses you have little control over. 

    • Utilities: Phone, disposal, water, electricity, gas heat, sewer.
    • Home: Mortgage (usually includes insurance and property taxes if not, insurance and property taxes.
    • Health: Dental, health, life, and eye insurance (these items are usually covered by payroll deduction) if not, than add them here.
    • Income Taxes: Include "Federal, state, local and FICA taxes only if you are self-employed.
    • Additional Outstanding Debt: student loans, retail installment contracts, credit cards, personal loans, medical debts and alimony payments.

    Non-fixed Expenses

    These are expenses you have more control over.

    • Food: Groceries, lunch, eating out, snacks, and date night.
    • Child support: Day care, babysitting and alimony payments (if it applies to you).
    • Transportation: Gasoline, maintenance, repairs, tolls, taxis, subway, fees and insurance premiums for all vehicles.
    • Debt Payments: Credit cards, student loans, and other loans.
    • Entertainment: Cable TV, computer expense, software, hobbies, dues, subscriptions, videos, movies & admission fees, amusement parks and vacations.
    • Clothing: Children and parents.
    • School: Books, supplies, fees and gym expenses.
    • Pet Expenses: Food, grooming, board and Vet shots (if this applies to you).
    • Miscellaneous Items: Toiletries, household products, gifts, church, other donations, grooming (haircuts, make-up etc.), birthday and anniversary cards, child allowance, spouse expense money (amount for each spouse to be spent by them for any reason) and insurance premiums (not covered by payroll deduction).
    • Savings: Emergency fund, savings for retirement or child's college fund and vacation fund.
    If you are still unable to determine how you are spending your income, keep track of your expenses for a couple of months or until you can more accurately list your expenses.

    Create The Budget Plan

    You are now ready to create your monthly budget plan. Using budget software or a Microsoft Excel spreadsheet will aid you in the process.  The budget plan will be divided into monthly buckets.  Take your total planned income for the year and divide it by 12.

    Take your planned categorized expenses based on prior actual expenses and divide the categorized expenses by 12. Enter your total income in monthly columns; then enter your total expenses in monthly columns.  Compare planned monthly income with monthly planned expenses.  The total monthly expenses must not exceed the total monthly income amounts.  If expenses exceed income, planned expenses must be decreased. A good budget plan should show planned expenses to be less than or equal to planned income.



    Share Plan With Family

    Now, sit down with the entire family and provide them copies of the proposed family budget plan. If your children are under the age of 5, don't include them unless they are receiving an allowance. Go over all the details of the plan. Provide information on what will be done with raises, bonuses, alimony, and overtime income if received during the year.

    Tell the family that this is a plan and is not cast in stone. Indicate that adjustments may be made during the year. Answer all questions. Get everyone's buy in. Then, STICK WITH YOUR PLAN. If any major situation should come up, hold another family conference and explain to them the situation.

    If you are single, make a commitment to STICK WITH YOUR PLAN. Make adjustments as needed.


    What To Do With Amounts in Budget Plan Not Spent For a Given Month?

    This is a real good question. As your budget plan is followed throughout the year, there will be months in which you will not spend a planned expense.  When this occurs, do not spend this money on something for which it was not designated. Most families have a tendency to spend the money on some other item. To prevent this from happening, keep the unspent planned expense amount in a savings account. When the need for paying the planned expense occurs, the money will be available to transfer from savings into the checking account.


    Conclusion

    If you follow the process above you will begin to take control of your expenses and have a road map for greater success. As you continue the process year after year, you will see new spending control trends. You will become successful in controlling your spending.  Remember, most people don%u2019t plan to fail, they just fail to plan. I have some resources that I would recommend for budget planning by clicking on one of the links below.


    You Need A Budget Pro - Personal Finance Software Program $49.95
    How to Get Out of Debt, Stay Out of Debt, and Live Prosperously: *(Based on the Proven Principles and Techniques of Debtors Anonymous) $9.36

    Quicken Deluxe 2010 $39.99
    Credit Card Debt $6.99
    The Budget Kit: The Common Cents Money Management Workbook $13.57