Ready, Set, Go! Let’s create your budget. These simple steps should result in your money plan.
Calculate your monthly income and record it in your budget record. Your monthly income is your net salary after payroll deductions (your bring home paycheck). Other sources of income that you receive on a consistent basis, such as child support, alimony, dividends, etc. should also included in your budget record. If any portion of your income is variable, such as commissions, you may need to average the amounts you received in the prior year. Otherwise, you should consider using the lowest amount received, as your basis of income for your budget.
Expenses—Mandatory and Discretionary
List the expenses by categories that meet your lifestyle. For example, my budget includes childcare expense. However, not everyone needs this category. Be sure that you avoid “miscellaneous” or “other” categories. These are often used to lump expenses, and will not give you a means to truly control your expenses, without assigning a more specific category. When determining your list of categories, be sure to include expenses that you pay quarterly, semiannually and annually. The list can be as simple as you would like, or in more detail if you want to manage more specific aspects of your expenses. Click here to see the typical family budget percentages in the United States. This budget will give you an idea of how simple your list can be.
On your list, separate the categories between mandatory and discretionary. Click here to see a sample list of mandatory and discretionary expenses. Based on your lifestyle and goals, the categories may be separated differently. At my house, cable TV is definitely discretionary, not mandatory; therefore, it is considered a form of entertainment, not a utility. Keep the names of the categories simple and meaningful for you.
Now, add your monthly budget amounts beside the expense categories. You should base this amount on how you spent your money during the last 12 months. Using your check register, your receipts, credit card statements and bills, add the amounts paid for each category during the last 12 months. Break down expenses that fluctuate into an average monthly figure for your monthly budget. You should do the same for any expenses that are paid quarterly, semiannually and annually. For example, car insurance that is $450 every six months would be $75 monthly ($450 divided by 6 = $75). By allocating these amounts to set aside, you should earn interest on these funds. You should have no problems with your normal monthly cash flow when these payments are due. Be sure not to duplicate expenses already deducted from your paycheck, such as medical insurance premiums.
Calculate your discretionary income by subtracting your total expenses from your total net income. Part of this income should be committed to the installment debt of your unsecured debts (credit cards). The remaining part should be committed to your short-term and long-term goals.
Determine the amount of discretionary income to be applied to your credit card debt. One of your goals should be to eliminate credit card debt. Some experts recommend not having any unsecured debt. Instead use an equity line of credit where the interest, in most cases, might be tax deductible. Others recommend that you use credit cards, and pay the balance within 30 days to avoid any interest. The Consumer Credit Counseling Service recommends that your credit obligations not exceed 15% of your take home pay. You should make the decisions that are correct for you, your family, lifestyle and goals.
Goals—Long-Term and Short-Term
Apply any remaining discretionary income to your goals. Review the amount that you are applying to your goals to determine if you will be successful. You may need to re-evaluate your budget and reduce expenses to allow enough discretionary income to reach your goals. Remember, be realistic and honest with yourself. The results will be significant when you are creating a money plan that enables you to reach your goals.
After following these steps, your money plan should be complete. Congratulations! For more information regarding the creation of a household budget or any other tax-related issue, please call Henssler Financial Tax & Accounting Division at 770-428-4025.