General principles for setting up a budget
I was a little late in getting our 2011 family budget put together for this year, but better late than never, right? Well, it is up and running, but what I discovered is that since we have kept a budget for so long and because our budget has stayed relatively static for so long, we can function for a few months without looking at it daily or even weekly. I am in the middle of entering our information from January and February and even though I have not completely filled in all the numbers, I have a rough idea of where we stand simply by having a general idea of our “intake” and “outflow”.
Over the years, I have met and interacted with many individuals who do not keep a budget. In my experience, these individuals are rarely in a great place financially, regardless of their income. Even billionaires need budgets. The difference between your budget and a billionaire’s budget is that your budget might fit on a single piece of paper while his budget is housed in an office building and requires multiple employees, several lawyers and a board of directors in order to keep everything on track. Here is an outline of the Stew family budget process:
Know your income
It is surprising to me at how many people do not know exactly how much money they make per month or per paycheck. The first place to start a budget is with your pay stub. Some people use the take-home or “net” pay amount. I prefer to budget using my gross income and I include a line in my budget for all of the various taxes and other withholdings. Our budget had to be adjusted this year to reflect the 2% social security tax withholding holiday. I can tell exactly how that change affected our budget.
Be sure to include all of your income, including odd jobs, tax refunds, etc. There are two types of income that I do not enter into our budget: bank interest and gifts. Interest is too hard to keep track of and savings account interest is so low right now that it is not worth the time. Gifts do not affect our budget because they are difficult to predict and when a person gives a gift, they usually int for it to be used for something special or extra.
Know your spending
Figuring out and recording income is pretty easy. Trying to get a handle on all of the money that you are spending is more difficult. We use the following general categories: giving, saving, taxes, debt, insurance and a category that I simply call “living”. Each of these categories are subdivided further into specific spending targets. I use our credit card statement in order to keep track of what we are spending. If you do not use a credit card, develop a system for hanging on to your receipts.
Set up monthly estimates
I used an Excel spreadsheet for our budget and if I am faithful to update it, I can see our entire financial picture at a glance. At the beginning of the year, I estimate our income and spending for each month in every category for the entire year and fill in the appropriate amounts. Using Excel formulas (most budgeting software will do this too), I can see our average monthly income, average spending, average cash on hand, average debt load and yearly surplus or deficit. Every time I enter an number into a cell, I can see how it affects the big picture.
Record actual income and spending
As the year passes, I replace the projected numbers with the actual amount that we earned or spent. The estimated spending done at the beginning of the year gives us a target each month. The amount by which we are under or over the target gives us the information that we need in order to make good decisions in the next month. The information in the budget tells us if we need to find a way to generate some extra cash, hold the line on spending, stand pat or adjust our budgets. Hopefully we will become aware of financial trouble in advance.
Everyone in your household should be included in the budget process, including your children. You don’ t need to tell them everything, but they need to know that you have a budget and that budget determines what you spend. You might even want to show them a line item while having a discussion about a particular want or need.
Be sure that your spouse knows how to look at the family budget and for which part of that budget he/she is responsible. Mrs. Stew has complete control over a portion of our budget every month and she decides how, where and when that money is spent within the categories of clothing, food and housing supplies. Periodically, we discuss whether that amount should be adjusted based on our family’s needs in her areas of oversight.
I use an Excel spreadsheet for budgeting. What do you use? Maybe you like a paper and pencil . . . whatever works! Have you ever tried budget software or techniques that did not work?