Your dynamic lifestyle will benefit from a dynamic budget, or one that changes as your year progresses. The more effort you put into your budget, the more you can do with it, including tracking spending, adjusting planned expenses and savings goals and projecting year-end numbers. In addition to basic income and expenses, your household budget should include formulas that adjust your savings and spending levels to help you adequately feather your nest.
An important start to any budget is your list of fixed expenses. These are expenses you have each month in the same amount. A car payment, rent or mortgage, cable or Internet bill, 401(k) or flexible spending account contribution, student loan payment and other regular payments are fixed expenses. For budgeting purposes, total your quarterly or semiannual fixed payments, such as insurance premiums, and divide them by 12 to let you see your average monthly expenses.
Variable expenses occur each month, but vary in size, such as groceries, utilities, dining out, gasoline and phone bills. For planning purposes, estimate a monthly average for these expenses so you can make annual projections that will help you set savings levels.
Necessary vs. Discretionary Expenses
You might think that morning cup of Joe is a necessary expense until you add up the cost and see its effect on your budget. If you need to cut spending at some point in the year, you’ll first look at your variable expenses, since fixed costs are usually obligations you can’t easily cancel. However, some variable expenses are necessary, such as groceries and phone. Highlight which of your expenses are discretionary, such as hair and nails, entertainment, dining out and clothing, so you’ll be able to quickly identify where you can start making cuts.
Add all of your income sources to your budget if you want to track your net worth during the year. This would include salary or wages, bonuses and commissions, interest earned, capital gains, employer 401(k) match and gifts from the folks. If you’re using a budget to control your spending, only include income that goes into your savings or checking account to help guide you.
Don’t wait until you have piles of money in your checking account to decide what to do with it or you might be tempted to blow it on impulse purchases. Your budget should include savings categories, treated as expenses, so you set aside money each month to reach your goals. Savings categories include retirement, home down payment, kids’ tuition, vacation, emergency fund and other needs and desires. If you think you have plenty of time to save for retirement, guess again. Almost half of Americans aren’t contributing to a retirement plan, according to a 2012 survey by the Life Insurance and Market Research Association. Following on the heels of that study, the Wider Opportunities for Women research firm found that approximately 9 million seniors are unable to afford basic living expenses.
If you don’t have a crystal ball, create a budget document that projects your income and expenses during the year to let you know if you need to make adjustments. In addition to including columns that simply add your expenses as they occur, add columns that show your monthly average spending during the year and project your year-end income and expenses at your current spending levels.
The best time to build a budget is before you're in a jam, before you start outspending your income. Any Scout knows this: Be prepared. And, if you know "be prepared," you also know a Scout is trustworthy, loyal, helpful, etc. You can build your budget the same point-by-point way. A successful budget is …
Determining categories for your expenses allows you to build a budget: rent or mortgage, food, insurance, entertainment. "Food" could be split into groceries and eating out. Make the categories narrow enough to be meaningful but not so small that you go crazy keeping records. For example, you could divide "Utilities" into phone, cable, electricity, etc., but packaging them lets you smooth out monthly cost differences. For example, air conditioning hikes your summer electric bill; heating boosts your winter natural gas bill.
Meticulously record your spending down to the last buck for at least a month. Three months or more is even better to get a sense of your average costs, smoothing out one-month anomalies. If you track costs for less than a year, sift through records for recurring quarterly, semiannual and annual costs – car insurance, for example.
If you track spending and it's higher than your income, there's only one response: Find ways to reduce expenses/spending. Don't insult yourself by building a budget you can't afford or by eliminating eating out when you don't know how to cook.
So you don't omit an expense, use a prepared worksheet to decide where you want your money to go. The National Foundation for Credit Counseling offers a good one, but there are others. Pay particular attention to setting aside money for expenses that occur less often than once a month. Insurance premiums or taxes aren't hard to remember, but what about magazine subscriptions, 90-day prescriptions or annual doctor exams?
Include money for long-term needs, such as fixing your home or replacing appliances or cars. For starters, simply build a contingency fund. It can be discouraging trying to follow a budget when capital expenses keep popping up to sabotage your efforts.
What are you doing after work? Not this afternoon, but 40 years from now. Build savings into your budget – aim for 10 percent but at least get any company matching funds for your 401(k) plan. Retirement always seems a long way off -- until it's not.
Just because you wrote all this down doesn't mean you can't change it. If you need a new car, you'll need to figure out a way to make the payments. One way may be to take advantage of some budgeted money you won't be spending to keep your old clunker going. Then you'll have to decide on the rest. But be realistic. It's hard to follow a budget if you keep moving money among categories each month because you started with unreasonable choices.
Don't forget to include fun. Cable TV provides only so much entertainment. Put aside money for a ball game or concert. Vacations, too. One radio personal finance guy advises that eating beans and rice now means you can eat filet mignon later. There's also nothing wrong in building a budget that includes some steak now, knowing that may mean you may need to eat beans and rice later.
Take advantage of the spreadsheet program on your computer to make sure money you've set aside for a category stays where it belongs. If you plan $50 a month for "tickets," you don't want that money missing when Springsteen comes to town and you need three months' worth of ticket money. Besides building your own spreadsheet, consider personal finance software, such as Intuit Quicken or AceMoney. You also can use a personal finance website, such as Mint.com orHellowallet.com.
As necessary, but at least once a year, check your budget against actual expenses and income changes. You won't have to start at zero, but you'll need to decide where to apply that pay raise.
The budget that worked for Mom and Dad might not be the best tool for plotting your financial goals now that you’re on your own. A traditional budget basically tells you how much money you have to spend and whether you can afford to save for something special or need to cut back your spending. A more comprehensive personal budget that addresses more than one scenario is your best bet to stay on track to meet your goals.
A traditional budget starts with a list of your income and expenses. After you subtract your expenses from your income, you adjust your spending levels and try to live on those budgeted goals for the rest of the year. Adding and recording items such as a retirement contribution or college tuition fund as savings helps you avoid overspending and meet long-term goals.
A traditional budget is static, telling you what you can spend based on best guesses made at the beginning of the year. A more progressive budget analyzes your monthly spending, compares it against your budgeted amounts and shows you where you will be at the end of the year if your income and spending levels continue at their current levels.
Lack of Flexibility
A traditional budget uses fixed amounts to plan for spending. This doesn’t take into account changes in your income. Using percentages to set certain spending levels helps you automatically cut back when you need to and contribute more to specific goals when you have the opportunity. For example, with a traditional budget, you might set aside $150 per month toward a college fund. With a more progressive budget, you can budget 5 percent of your excess income toward the fund; you automatically decrease this discretionary spending during months when cash is tight and contribute more during better months.
With a traditional budget document, you list income and expenses down one side and the months of the year across the top. At the end of the row of months, you add a “Budgeted” and a “Total” column. While this allows you to track your spending and see how you did at the end of the year, it doesn’t let you monitor your real-time performance. With a more progressive budget, you can add “Average Monthly,” “Budgeted Monthly” and “Projected Annual” columns. Each month, you can compare your actual spending to your budgeted monthly numbers to see if you need to make any adjustments to your annual plan. Keeping track of monthly spending lets you see what your numbers will be at the end of the year if you keep spending at the current rate.
Creating a budget based on your average monthly expenses can get you into trouble if you don’t plan your cash flow correctly. For example, your average monthly expenses may be $3,500 throughout the year, but during some months, they might be much higher, based on a semi-annual insurance premium, quarterly tax payment and other expenses that come due. Creating a cash flow budget will help you budget and save for uneven, or variable, expenses.
List your income sources for the year. Include job earnings, interest, gifts, sales of personal items and other sources of cash you expect. List your expected income by month.
List your anticipated expenses for the year. Use last year’s financial documents, such as bills, invoices, bank and credit card statements and tax returns to guide you. Put expenses into fixed or variable categories. List your expenses in the months they will come due for payment, such as insurance premiums, tax payments, vacation spending and Christmas shopping. Estimate your total expenses for each month.
Subtract your expected expenses from your expected income each month and determine whether you will have any months where your expenses exceed your income. Budget savings from the months you expect more income than expenses to use during months when you will have a shortfall. Keep those savings in your bank account until you need them to make your extra payments.
Review your expenses to determine if you have any opportunities to reduce or shift your expenses. Look at variable expenses first, such as dining out, entertainment, clothing and hair and nails. Don’t skimp on groceries — a common mistake many budgeters often make, according to personal finance expert Dave Ramsey. Begin reducing expenses during months before you expect a deficit to begin building savings.
Contact creditors to determine if you can spread payments. For example, change from semi-annual to quarterly insurance premium payments to even out your cash flow. Look for credit cards, insurance premiums or other debt that comes with a payment grace period. If these come due during months when you will face a deficit, schedule your payments to take advantage of the grace period.
Contact your payroll department to suspend your 401k match contribution during months when you will need that cash to pay extra bills. Confirm stop and re-start dates for this. Determine if you will need to sell any securities to pay bills one month and how much lead time you will need to do this.
Shopping on a budget means that you decide in advance how much money you have to spend and then stick to your limits. Overspending in one area means the money has to come from another part of your budget, so it’s important to give careful consideration to any changes before you implement them. Make good choices and think long and hard before spending any money, to help you stay within your limits.
Before you decide how much you have to use for shopping, figure out your income and then budget for essentials such as housing and utilities. List expenses in order of importance, and then use your income to pay for the essentials in that order. Keep to the budget you have set for yourself and avoid impulse buying.
Make a list before you go to the store and then stick to your list. Shop at discount stores and other places where you can get good buys on high-quality foods, such as at your local farmers market. Buy discounted meats that are close to the pull date, then either cook or freeze the meat the same day. Avoid buying candy and junk food since these tend to be expensive and provide little nutritional value. Purchase food in bulk whenever possible and prepare large meals so you can freeze a portion for later use.
According to financial expert Dave Ramsey, people tend to spend more when using credit cards, putting them over their budget limits. If you don’t pay the card off, the interest is so high that it can hit your budget hard, adding substantially to the cost of anything you buy. Save the credit card for a real emergency, and then make it a priority to pay off the balance as quickly as possible. Pay cash whenever possible so that you see exactly where your money is going.
Shopping online for many of the items you need gives you access to many more choices than you typically have in one geographical area, plus it helps you to avoid impulse buying. You can often get the same brands you would buy locally from an online store for considerably less money. Be sure to factor in the cost of shipping and read the fine print to make sure you’re getting what you pay for. Look for discount coupons and free shipping offers to get the most from online shopping.
If you live on a tight budget, the best way to shop for the extras you want is to save up for them. Instead of going overboard on a big expense in a single month and coming up short in other areas, put away a portion of what you will need every month for several months in advance. Once you have the entire amount saved, you can pay up-front for what you want without the worry of a credit card bill.
Monthly budgets vary from person to person because of everyone’s distinct financial obligations and personal goals. Not everyone may have the same student loans or credit card debt that you hope to reign in by sticking to a budget. While the amounts you dedicate for each expense may vary, some typical components show up on everyone’s monthly budget.
Go through that stack of bills you get every month and include an amount for each one, including rent or mortgage, car, insurance, phone, Internet, all utilities and student loan and credit card payments. Some bills, like your electric bill, vary each month, so you’ll need to figure up an average based on a few months worth of payments. Factor in other necessary monthly expenses like prescriptions, childcare and pet needs. Figure out a monthly average for food and fuel by keeping an expense journal a month or so before setting up your budget. Keep your food budget down by cooking at home, using coupons, taking advantage of grocery store sales and shopping at your local farmer’s market.
Set aside some money in your budget for discretionary expenses -- like those weekly pedicures and morning lattes. This portion of your budget is where you should start trimming first to meet your budgeting goals. For instance, let’s say you get a $20 pedicure every week. That’s $1,040 a year. Getting one every other week will put an additional $520 into your savings account every year. Take your lunch to work more often, and if you’re not using that gym membership or movie rental club, then stop paying for them.
Budgeting isn’t exactly the latest trend, but something must have compelled you to consider living on a budget. Maybe you’re tired of living paycheck to paycheck or maybe you’re ready to move from apartment dweller to homeowner. Whatever your reasons are, you need to include your long-term and short-term goals in your budget. It will be easier to stick to a budget by starting small -- like maybe saving an extra $100 a month or paying an extra $50 toward your credit card bills. Work your way up to even bigger savings as your spending habits improve and you become more adjusted to your budget.
Maintaining your budget is crucial and everyone in your household has to get on board with tracking their expenses so that every dollar is accounted for. Excel spreadsheets are ideal for keeping track of monthly expenses. Save time by using one of Microsoft’s free budgeting templates, available through the company’s website. When it comes to tracking daily expenses, naturally, there’s an app for that. Check with your mobile service provider to see which expense tracking applications are compatible with your phone.
Budgeting, no matter how boring it may sound, is a crucial part of making things work financially with your partner or spouse. Working together to achieve goals is the cornerstone to any relationship. Take the time, sit down together and hammer out a budget that fits your needs and ultimately leads you to the financial freedom needed to make your goals a reality.
Go through your bank statements, paychecks and bills from the past year. If you have any investments, include those in your organization too. From there, organize into three piles: Income, bills and extra expenses. Once that is completed, sit down with your partner to discuss not only your monthly goals, but also your plans for the future. Those may include plans for a down payment on a house, saving for a car, planning for a wedding or making plans for children down the line. Be sure you are both on the same page; this process must be a team effort to be effective.
Combine the monthly income of you and your partner. This includes paychecks, any sort of side businesses, such as an eBay account, or any type of freelance work. Think of this as the pool in which you’ll be able to play.
Look at your pile of expenses and characterize them as either needs or wants. Bills are the most important of the bunch, especially the household bills that are needs, such as utilities. It is just as important to pay these monthly bills on time, as it is to pay your rent or mortgage on time. Doing so leads to an easier financial future. In your expenses, include your bills, any type of car expenses, insurance, groceries, credit card payments and anything that you spend money on. While doing this, talk with your partner to see if anything that you pay for is no longer needed or could be cut back, and take note of it.
Compare the monthly income and monthly expenses to each other. You should be making at least three times as much as your basic rent or mortgage. If you and your partner see that your current expenses exceed your monthly income, you need to talk about making serious cutbacks.
Cut out the expenses that you no longer deem necessary, even if they do not exceed your income. The point of a budget is to follow a plan that allows you to save money for the future. So, look at some of those bills or expenses and figure out what needs to go. Maybe it’s the cable TV service with the high-definition sports package. Perhaps it means cutting back on eating out. Whatever it is, talk it over with your partner and stick to the plan.