Thursday, July 21, 2011


Lets start with Budgets. This is a long topic so we will cover it in a few postings.
What is the purpose of a budget? Most people tend to think a budget is simply for tracking your expenses, but that is only partially true. A budget does keep track of expenses, but more importantly its purpose it to outline how much you are allowed to spend each month one each expense, and to help you keep from spending more than you plan for. Sure, there are emergencies, which will come up, but by using a budget you will be able to save for that “rainy day”. That “rainy day” could be any numerous event, such as job loss, medical emergency, a natural disaster, or other event which you cannot see coming.
A budget should be quick to create and easy to follow. It is like checking your email. It only takes little while each day, or maybe 30 minutes on a weekend to update, but the pay-offs will be great.
I will outline the steps to create a budget, then go into more details about each step so that you understand what is involved.
How to create a budget that works for you.
1) Write down all expenses you have each month.
2) Categorize each expense, such as housing (which might be mortgage payment or rent).
3) Add up all expenses for the month.
4) Write down all income you get each month.
Detailed explanation of the above steps.
1) All expenses include: food, cleaning supplies, housing, gas (or other transportation costs), oil changes, new tires, automobile license and registration, insurance (medical, dental, automobile, home owner’s/renter’s), medical supplies, phone bills, utilities (water, sewer, heating, electric, etc), and other expeneses, such as eating out, christmas and birthday gifts. These are some of the expenses you might have. If there are others be sure to include each one. If you miss something, that is ok. When you remember you can add it to the budget. Please note that some of these might be higher in the winter than in the summer, such as heating expensese. If this is the case, then take the most expensive winter month amount, and add it to the lowest summer amount then divide by 2 to get the monthly average. Do this for all expenses that are not constant so you get an average to provide the most accurate representation you can get.
2) For categories, label each expense, such as groceries (whatever groceries you buy), transportation (could be ), housing (rent or mortgage), health insurance, dental insurance, etc. Do this will all items on the list until they are all categorized. Some might fall in the same categories, such as water, sewer, and garbage pick-up are all part of utilities.
3) This is just simply adding up all expenses to see how much you are spending each month on all expenses. If you are like most people, you will be quite shocked at how much money you spend each month.
4) For your monthly income use your hourly wage and multiply that by the number of hours you work each week. Then multiply that number by 52 (because there are 52 weeks in a year). Next, divide that total number by 12, (number of months), to see how much you make each month. If you are on salary, simply use your salary amount to calculate your yearly income then divide by 12 to see the monthly amount. Here are a few examples. Say you make $12 per hour, and work 30 hours one week and then 35 the next, and that same schedule repeats itself. Since you work 30 hours one week and 35 hours the next add the two numbers 30+35 = 65 then divide that number (65) by 2 to get a weekly average of 32.5 hours per week. Now use 32.5 times your hourly pay of $12.00 to get your weekly pay of $390 then multiply 390 and 52 (52 weeks in a year) to get your yearly income of $20,280 and then divide by 12 to get the montly gross income of $1690. Gross income is before taxes, insurance, 401k etc. So, for this example your monthly income is $1690 minus your deductions. You will have to look at your pay stub to see just what those amounts are, but for this example lets say you do 5% to 401k (thats $84.50 per month), taxes of 20% ($321.10), medical and dental insurance is $110, so that leaves you will a net income of $1174.40. This number, ($1174.40), is what you will use for your monthly income for budgetting.

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