The word budget to most people is considered a swear word meaning cut back, deprive yourself of fun, and live a restrictive lifestyle. It does not have to be bad or painful if you keep things simple. When creating a budget there all kinds of different methods, theories, and ideas. My number one piece of advice is: Keep it simple. If you get too crazy and try to change too much at once, you will fail; that’s not what anyone wants. If you are familiar with Microsoft Excel, you can use the computer to assist, but a piece of paper, pencil, and calculator work fine too. Whatever floats your boat. Remember, SIMPLE. Don’t stress yourself out over creating a budget or sticking to every penny. Budgets are fluid documents. They are meant to change and adjust as life happens. It’s nice to look at an annual budget but manage it on a monthly basis. We use balanced based budgeting. Meaning, we assign our revenue to expenses every month and adjust as needed to “breakeven” at the end of the year.
We are already a month into 2017. Usually in January, I sit the handsome husband down to review the prior year expenditures and re-set our upcoming year budget. I will walk you through our process and how to set up your own.
1: Start with your Total Annual Revenue. To get to your total annual revenue, you want to look at net income. This is not the amount you make per hour/year. This is the amount deposited into your bank account on payday, after all the taxes, health care, and retirement deductions come out. This is the amount you actually get to live off of until the next payday. If you have a job that you get a salary amount, this step should be straight forward. Use your bi-weekly amount and multiply it by two (most months have 2 pay days) for the monthly revenue, and multiply the bi-weekly amount by the number of pay periods in the year for the annual amount (most often 26). If you have an hourly job and the number of hours is not consistent, try to take an average of the last three months to figure out the monthly revenue, and multiply the quarterly amount by four to get an average income for the year. If you are self employed and income is sporadic, look back at last year, think about whether or not the year had major exceptions, and make adjustments as you deem appropriate. Example: If you are a contractor and you made $125,000 last year but you know you had a special job that paid $50,000 and it’s unlikely you will get another job like that, use $75,000 for your annual revenue and divide by 12 to get a monthly revenue. It is always easier to adjust a budget if you bring in more income than projected. If you share a household with another individual who has an income, add a line for their net income. Add the two together to get the Total Annual Revenue. This number is important, but not as important as you would think. There is a common misconception that in order to be wealthy, one must have a great deal of revenue. That is not necessarily the case, but is probably a good topic for other post entirely (maybe next week). Below is an example of a revenue template in Microsoft Excel:
|Revenue||Bi-Weekly Amount||Annual Amount|
2: Make a list of Expenses. Start with the largest payments per month and multiply the monthly amount by 12 months to get the annual amount. When you finish the monthly expenses, think about items that happen once a year like holiday’s and birthday parties. Take the annual amount you normally spend and divide that by 12 to get a monthly budget amount. Don’t forget to include seasonal expenses and items such as allowances. If you are like us, you will have additional heating bills at least 5 months out of the year. Take the amount you paid last year and adjust for exceptions. Example, last year we had an exceptionally warm winter and did not spend as much as we normally would on heating oil. We had to look back a year to a normal winter and see what we spent in order to budget for the upcoming year. Below is an example I created; you may need to add / delete items for your household:
|Expenses||Monthly Amount||Annual Amount|
|Student Loan 1||150.00||1,800.00|
|Student Loan 2||50.00||600.00|
|Car Payment 1||300.00||3,600.00|
|Car Payment 2||350.00||4,200.00|
|Credit Card 1||50.00||600.00|
|Credit Card 2||50.00||600.00|
|Bank Loan 1||25.00||300.00|
|Bank Loan 2||75.00||900.00|
|Life Insurance – 1||30.00||360.00|
|Life Insurance – 2||45.00||540.00|
|Hair / Clothing||75.00||900.00|
|Water / Sewer||80.00||960.00|
3: Tweak the expense items. When you finish the first draft, take a look at the bottom line. Make sure you assign each dollar to an expense category. You want monthly revenue minus monthly expenses to be zero, but the annual revenue minus annual expenses should be equal to one month of revenue. This is because two months a year have 3 pay periods. Those extra pays should be able to go directly into your savings or to pay off debt because you have all other expenses covered in your budget. Be sure to be honest with yourself when entering figures. If you know you like to go out for dinner and a movie, don’t set a budget amount for Entertainment that restricts you from doing so. Be realistic. You won’t be successful just because you put a number on a paper. It has to be truthful and represent you: your lifestyle, your goals, your desires, your happiness. (And your mate’s if there are two of you.)
Whew! Congratulations, you have yourself a budget. That was the hardest part to budgeting, I promise! Please tell me what you think or ask questions in the comment section.