The Family Budget – Series 7 – Constructing the Budget

I see too many times where a template or boiler plate for a family budget is used incorrectly. Taking some form and putting in your figures and coming out with results is not a budget. It is simply posting what you made and how your spent it. This is not a good idea to start with.

Start by first using your “net” income or average your income over the last twelve months. If you are on a commission basis you will need to average, if you are on a straight base pay (exclude bonuses) then add up the net and divide that by twelve months. This will give you the first line item in your budget call it “Revenue.”Now you have to do some digging, you must look at what is spent during the past year.

The basic budget will include:

• Rent/Mortgage
• Insurance (Do not include contributions at work)
• Utilities (gas, water, heating and air conditioning)
• Telephone
• Internet or cable bundle
• Food/Hygiene/Household Products
• Clothing
• Education or training expenses
• Auto payments
• Transportation costs (if you take a bus or train to work or shopping)
• Car Repair and Maintenance
• Gas
• Credit Cards/Other Debt
• Savings

Now you will have the basic structure of these items, but there is still some more work that has to be done.

You will need to lay out a format for your budget, five columns will be necessary. They are the line item in the first column, title that column as Item. The second column will be Budget Amount, the next column will be Percentage, the next column will be Actual and final is Variance.

The first two columns budget and percentage is what we will work on first. Later you will start to fill in the balance of the columns.

The first thing is to place savings at the top of your list. If you have savings take a look at it and see how much is currently in there. Only take into consideration what you saved in the last year. Take your average yearly savings and divide it by your net income. This will give you a percentage of savings against your net income.

Example: Saving $ 1200.00 / net Income $ 35,000.00 = 3.4{da74ea48cec7d1c659e4125ffe517180d7bd6cbbe5631d32f11d21c45900f39b} then divide it by the twelve months.

Do not get stuck on this right now, just take the figure and lay it out as it is. We will work this out later.

Under the title of Budget you will have this so far:

Budget Percentage
Income 2,920 100{da74ea48cec7d1c659e4125ffe517180d7bd6cbbe5631d32f11d21c45900f39b}
Savings 100 3.4{da74ea48cec7d1c659e4125ffe517180d7bd6cbbe5631d32f11d21c45900f39b}

The next thing to do is to post your rent/mortgage monthly payment. If you are paying mortgage you must break it out to principle and interest.

Rent 800 27.3{da74ea48cec7d1c659e4125ffe517180d7bd6cbbe5631d32f11d21c45900f39b} or
Mortgage 400 13.7{da74ea48cec7d1c659e4125ffe517180d7bd6cbbe5631d32f11d21c45900f39b}
Interest 600 21.0{da74ea48cec7d1c659e4125ffe517180d7bd6cbbe5631d32f11d21c45900f39b}

It will make a big difference in your view if you know the breakdown of Mortgage and Interest plus any other fees.

I am just showing here how to calculate your opening budget. On the mortgage end of things you will obviously be including real estate taxes and any other maintenance data that you gathered from the prior year. All elements of expense are important.

Now for those who tithe you have to place that on the budget as well. There are arguments as to whether or not the allocation should occur from the gross pay or net pay. Well that is up to what your budget and your conscience settles on and is comfortable with. Most churches argue that you must tithe from the gross, but if that is too much so that it harms your financial future than maybe it most come from your net.

Then again, in some cases neither situation is tenable. You have to go to what dictates and allows for your financial future. Some people can give a lot more and other well ten or twenty bucks might be all they can really give. This is always a personal choice.
So now let us get back to the budget allocation. Let us say you saved in the month of January only fifty dollars, you will show a variance of fifty dollars. Now fifty dollars just doesn’t disappear, that money was spent somewhere. If you look at your entertainment item you find that you spent fifty dollars more than you should have.

Item Budget Percentage Actual Variance
Savings 100.00 3.40 50.00 (50.00)
Entertainment 25.00 0.08 75.00 50.00

This is where you would start, now if you have more expenses than you have income that would generate a percentage over one hundred percent. Now, if you have the situation that reflects more than one hundred percent the only way to correct that is to reduce costs from other areas. Maybe you may want to reduce your costs on clothing. You could look at your credit card payments and pay a bit more into that to reduce the minimum charges.

You have options once you understand your pattern of expense. In some cases, you realize that you should not have your credit card on hand every time you leave the house. One true test of impulse buying is to take a look around your home and see if you spent money on something you don’t use regularly or ever. If this is so, then your only option is to stash the card away or tear it up and don’t use it, until your impulse is put to rest. If you also look around and can’t figure out where you spent all that money, take a look at your statements and break those down.

This of course is just a view in the rear view mirror. This is money that has already been spent. The best thing is that now you can look into the present month and gather that data and see how it compares to your past. Once you see what you have already average in the past year, now wait till the end of the next month and post that to the budget and see what you come up with.

One thing to realize a negative can be good or bad. In the example above you will notice that savings has gone down. That is not good; one is spending the savings money elsewhere. From a preliminary look you can see that entertainment expenses went up. This kind of spending can and will severely impact your savings and should raise the red flag.

Certain expenses will vary a little each month and seasonally as in utilities due to the change in climate. You can save money on certain items such as phone or food items by using the phone less or using coupons for food purchases etc. If you subscribe to a lot of different magazines you may want to pick only one or two and forget the rest.

One has to take a good look at all spending patterns to see if there are some things that can be avoided or that need to be done away with altogether. Now, we take the time to figure how to save money on these different items and implement the new spending plan.
Once this is done then we can straighten out what was heading into the disaster zone to something better. Let us say we took action and by doing just some little changes we now are looking better.

With some discipline and future prospective, we can change from where we are to where we are going. One caveat, don’t try to conquer Rome in a day, that type of strategy usually never works.

In order to create a future budget, you will need to master the current budget. We start with a budget based on the past year. The next step is to see where you stand on a current month. Then in comparing the two, you draft your plan to turn your budget into a surplus.

Once you have your monthly budget under control, now you can look into the future and set aside for other things, such as new car, investments, a down payment for a new home, retirement, a better apartment etc.

Savings gives one purchasing power. Now we are looking at what transpires month by month. We do need to look at the coming year or years in full as well. You will need to determine how much you want to see in your savings at the end of the year. You may decide that you want to double up on your car payment for a few months to accelerate payment on that note, which in turn will save you money. You might want to look at some other financing that will allow you to pay off any encumbrances at a lower interest rate.

This budget is just an example, it could be that you have so much debt that you main goal is to pay off the debt as fast as possible. To confront where you are financially is very important. If you don’t know where you stand, you will fail for sure. Should you carry this out each month you will know where you stand and be in control of the present and future.

It is my hope that this series regarding the family budget has stirred some fiscal responsibility on a personal level. Futures are not built nor designed in a day, but they are in fact incremental.