Getting Your Finances in Order
Hello everyone, I Am Adrian Brown, "Your Financial Physician". In this article I will share with you six easy steps to establish a workable budget. A budget is simply a spending plan a tool to assist you in spending money wisely and reaching your family's goals. By cutting out inefficient spending a budget can give your family more for its money. Of course preparing a budget takes planning and following a budget takes determination. The cooperation of the entire family is required to make it a success.
Your budget must be tailored to your own family's needs, desires, and income. Here are six easy steps to us in developing your own personalized budget.
1. Setting Your Goals: The first step in preparing a spending plan is to determine your goals. What does your family really need and want? Both husband and wife should participate as equals in this and other discussions that will follow. If the children are old enough let them participate also. Considering the suggestions of all family members will help assure success of the plan.
You may find it helpful to think about your goals in three steps. First, what are your long term goals- things that you want in 10 or 20 years, perhaps even longer? Next, think about the more immediate future - the next 5 years for example. Then list your goals for the coming year. This way your budget will include some savings toward future goals, and you will not let your immediate desires push your other goals aside. of course goals change as the size, age, and income of the family changes. A young couple may want to concentrate on establishing and furnishing its home. The family with growing children is interested in providing adequate food, clothing, and housing; and maybe a few luxuries. After the children are grown saving for retirement years may seem most important.
Here is a tip: You will find it easier to keep track of your budget if you use some sort of financial record book. It need not be expensive or elaborate; a loose leaf notebook with lined paper is excellent for this purpose. You also can find several types of budget books in a variety of stationery stores.
2. Estimating Your Income: The second step in setting up your budget is to estimate your family's income. Before you can plan wisely you need to know how much money is available to you during the planning period. A budget may cover any convenient period of time. Most budgets are for 12 months, which may coincide with the calendar year, school year, tax year; or some other convenient period. If this is your first attempt at making a budget you may want to set it up for a 3-month trial period. After you see how your plan works you can revise it to cover a full year. Write down all the funds that you expect to receive during the planning period. Include wages or salary from your regular job, net profit from a farm or business, interest from savings accounts, stock dividends, social security benefits;etc. If any of your income items are subject to fluctuation play it safe and use the smallest amount that is likely.
3. Estimating Your Expenses: Now that you have calculated your income, it is time to estimate your expenses for the planning period. If you have detailed records of your previous spending, they can serve as a guide. If not, you may be able to recall many of your past expenditures by looking through your cancelled checks, receipts, and old bills.
List each item of expense that your family had in the past. Include fixed payments such as car payments, mortgage/rent payments as well as contributions and other predictable expenditures. Don't overlook the small items that can add up to a sizable chuck of the paycheck - haircuts/weaves/salons, cleaning, lunches, newspapers; etc.
If you have trouble recalling all of your expenses you may want to start by keeping accurate records of where your money goes for two or three months before attempting to set up a budget. Your records will help you decide whether to continue with your present pattern of spending or to make changes.
If you are satisfied with what your dollars have given your family in the past, allow similar amounts in your spending plan. But chances are that you are not satisfied, if this is the case you will want to look at your spending with a critical eye. Until you study your records you may be unaware of overspending and poor buying habits.
Be realistic in revising your allowances for expenses. Resolve to cut out shopping sprees, bargains you can't afford, and overuse of credit. Stay flexible enough that you can cope with changing conditions. For instance, a child entering school may mean more clothes, an increased property tax rate may mean higher taxes. Keep your estimate of expenses handy so that you can refer to them as necessary.
4.Setting Up Your Budget: You are now ready to set up your spending plan. It will be based on the three calculations you have already made - your goals, your income, and your expenses. Categories can be added or deleted to serve your own family's requirements. The best way to have money available for major expenses and future goals is to set aside money regularly for those purposes. The secret is to earmark the money before you spend your paycheck. By setting aside a predetermined amount every pay period you have greater flexibility in managing your money.
It is best to keep your reserve funds separate from your other funds in order to avoid spending them impulsively. You might put them in Government Bonds or in a savings account. Not only will they be out of convenient reach, but they will also be earning interest. You should designate a small amount of your income for emergencies that may arise. Of course insurance is one of the best ways to protect your family against major disasters. Every family has frequent minor crises that are to small to be covered by insurance, yet to large to be absorbed into a day-to-day budget. Examples might be a dead battery or an appliance that needs extensive repair. If this fund builds up to more than you need for emergencies you may want to divert the excess into your "future goals" fund.
By setting aside a definite amount each month, you spread the cost over the entire year and will have the money to meet such expenses when they are due. For example, if your real estate taxes are $360 per year, you can have this amount by setting aside $30 each month. If you have debts or past-due-bills, you will want to provide for these payments in your budget. This is a good time to again review the way you have managed your finances in the past. If your family has heavy debts, "Find The Reason".
The next step in setting up your budget is to enter the regular (fixed) expenses for each month. These may include rent or mortgage payments, utility bills, installment payments music or dance lessons, etc. Once you have listed your fixed monthly expenses you are ready to plan your day-to-day expenses - those that vary from week to week or month to month. These are the most flexible entries in your budget and are the easiest to cut when you need to economize. By looking at your past records you can estimate how much you have been spending on food, clothing, transportation, and other day-to-day items. At this point you will have to decide whether to keep spending approximately the same amounts or whether you should make some adjustments.
You may prefer to enter regular church or synagogue contributions under regular monthly expenses. Because it is impossible to anticipate every personal need it is usually a good idea to give each member of the family a small allowance that need not be accounted for.
5. Comparing Your Income and Expenses: Now add up the figures in your Family Spending Plan and compare the total with your Estimated Income, if the two totals balance fine! If your income exceeds your estimated expenses this is even better. But what if your Estimated Expenses are greater than your income? Obviously, the first step is to review every item of expense to determine which items can be reduced or even eliminated entirely. Budget cutting should be a family project, with all members suggesting economies they are willing to accept.
Take a good look at your day-to-day expenses. You may be able to substitute articles that cost less, but serve the same purpose. Buy a new slipcover instead of a new sofa. Eat hamburger instead of lobster or steak. If possible use public transportation instead of the family car for getting to work. Could the amount you have allocated for recreation be reduced or eliminated? Most families will find a number of budget items that can be trimmed.
After cutting expenses if you are still unable to balance your budget, you have to consider ways of increasing the family income. If the wife has not been working she might take on a full or part time job. However, it is a good idea to first compare the added cost of working outside the home (clothing, lunches, transportation, child care, etc.) with the added income. The husband may be able to find ways of producing additional income. Could he accept overtime work, or take on a part-time job without taxing his health? Can the children do odd jobs to produce some income?
6. Making Your Budget Work: Now that you have your Family Spending Plan on paper, it is time to try it out. You will need to develop good buying habits, and you will need to keep records so that you will know whether your dollars are really giving your family what it needs and wants. Keep your records simple. You need not account for every nickel but you do need to know where your money goes.
To keep track of your day-to-day expenses use a form in your financial record book. Make a separate column for each category of expense and allow sufficient space to list each item purchased. Cash items should be recorded daily so that they are not forgotten. Purchases made by check can be entered at your convenience throughout the month.
At the end of the month add up the amounts spent and transfer the totals to your financial records book. Compare what you actually spent with what you planned to spend. If you find that there is a significant difference, (Find Out Why!), the reasons may help you improve your budget. As you move ahead on your Journey to Wealth use the budget tool to help you along the way.
Well, that's it for this article. Until next time, I Am Adrian Brown "Your Financial Physician". And Remember: "All Things Are Possible for You".