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Developing A Successful Home Budget
By: Francis Kier
This is probably the most requested topic that I receive, normally after someone
gets a large unexpected expense, or they start thinking about retirement and
realize that they have saved a woefully inadequate amount of money.
I recommend using a monthly time-frame to look at your cash inflows and
outflows, because most bills are monthly and four weeks is a short planning
period that most people can manage. The first thing to do is determine your
monthly after-tax income. Usually, this is the amount of money from your
paycheck that gets deposited into your checking account. If your income is
variable, then use an average of the last three months. (Any savings account
interest income would be a bonus.) Next, list out your fixed monthly expenses,
such as rent, mortgage, car payment, phone, electric bill, etc. All of these
numbers can be changed in the long-term, but first you need to determine a
baseline budget of where you are right now.
Make sure you include all of your utilities; some are only paid quarterly or
annually, like car insurance, the water bill, or an association fee. Take these
expenses and calculate what they would be on a monthly basis. For example, if
your water bill comes quarterly, divide it by 3. If you have semi-annual car
insurance, then divide it by 6.
So now you have your fixed monthly income and your fixed monthly expenses.
Deduct one from the other, and you have the variable amount of money that you
are free to spend any way you want for the remainder of the month. From this
remaining amount of money, start listing out your main categories of variable
spending: groceries, entertainment, medical expenses, clothing, dry cleaning,
personal care (haircut, nails, etc.), and gifts. Take each of these variable
expenses and put an amount next to them that you think represents your average
monthly spending for that category.
Make as many subcategories as you need to make an accurate estimate. The more
precise it is for your spending habits, the more effective it will be for you.
For example, food can be broken down by grocery store/fast food/dining out/work
lunch/etc. Then go through the last few months of your checkbook and credit card
statement looking for any spending that hasn’t been covered so far that you need
to include for your situation.
Now you should have a total number for your monthly income, total monthly fixed
expenses, and total monthly variable expenses. The moment of truth is when you
deduct the two expenses from your income to see if there is anything left over.
Don’t panic if it is a negative number – it is far better to discover this out
now, rather than building up credit card debt later. Most people comment
somewhere along this process, “Oh, so that is where my money is going. I had no
idea I spent so much on that!”
Seeing all the numbers in black & white can help you prioritize (and negotiate
with all the other spenders in the family). From this beginning budget, you can
start to set monthly targets for spending categories, you can focus on reducing
the largest expenses, and find areas where you should start doing some
price-comparison shopping. And did I mention that saving a 5-15% of your income
should be an additional fixed expense? Yes, you need to pay yourself first!
Having a budget is the critical first tool in managing your money. Wielding this
tool allows you to finally start making financial decisions based on the facts
instead of fiction. You can plan for expenses instead of being caught by
surprise. And most importantly, figure out how to move forward with goals like a
big vacation, a new car, or investing.
About the Author:
Francis Kier has an MBA in finance and shares his two decades of experience with
investing and personal finance. More of his articles are available at http://investing.real-solution-center.com.
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