BUDGET ACTIVITIESA budget allows you to meet your personal goals with a system of saving and wise spending. Having a plan for saving will help you do the following:
- Live within your income.
- Make wise buying decisions.
- Avoid credit problems.
- Plan for financial emergencies.
- Develop money management skills.
- Achieve your financial goals.
Having a written budget is a key part of successful money management. Your budget may be a simple record of how much you make, how much you plan to spend, and how much you want to save. On the other hand, your budget may be a more detailed record with specific amounts to be spent in categories such as food, clothing, and transportation. A good budget should take very little of your time, but it should provide needed information on your spending and savings plans.
THE BUDGET PROCESSThe process of creating and using a budget involves four main steps.
1. Set financial goals.
2. Plan budget categories.
3. Maintain financial records.
4. Evaluate your budget.
Any individual, family, or organization can use these steps to aid them in using available financial resources.
Set Financial GoalsSetting financial goals is the first step for any financial action. Goals identify results you want to achieve. Your financial goals should take a SMART approach—specific, measurable, action-oriented, realistic, and time-based. Figure 16-3 provides more details about the SMART approach.
Writing down short-term and long-term goals will help you decide how to spend and save your money. If your goals include going to college, your budget will require more for savings. If you are working at a job that requires you to spend a large amount for transportation, you will likely budget more for this item.
THE BUDGET PROCESSThe process of creating and using a budget involves four main steps.
1. Set financial goals.
2. Plan budget categories.
3. Maintain financial records.
4. Evaluate your budget.
Any individual, family, or organization can use these steps to aid them in using available financial resources.
Set Financial GoalsSetting financial goals is the first step for any financial action. Goals identify results you want to achieve. Your financial goals should take a SMART approach—specific, measurable, action-oriented, realistic, and time-based. Figure 16-3 provides more details about the SMART approach.
Writing down short-term and long-term goals will help you decide how to spend and save your money. If your goals include going to college, your budget will require more for savings. If you are working at a job that requires you to spend a large amount for transportation, you will likely budget more for this item.
Plan Budget CategoriesMost financial advisers recommend that an amount be set aside for savings as the first part of a budget. If savings are not considered first, other expenses may use all available income.
After savings, two types of living expenses must be considered: fixed and variable expenses. Fixed expenses are costs that occur on a regular basis and are for the same amount each time. Examples of fixed expenses are rent, mortgage payments, and insurance premiums.
Variable expenses involve living costs that differ each time and may not be as easy to estimate. These types of expenses include food, clothing, and utilities. Some variable expenses, such as medical and dental costs, occur less often and may be large when they do occur. Such expenses must be provided for in the budget.
The amount budgeted for savings and other expenditures is referred to as an allowance. An allowance is the amount of money you plan to use for a certain budget category. Although budget categories can vary for different situations, eight main divisions are commonly used.
1. Savings Savings accounts, government bonds, stocks, and other investments
2. Food Food eaten at home and meals eaten away from home
3. Clothing Clothing, shoes, dry cleaning, and repairs
4. Household Rent, mortgage, property taxes, insurance, utilities, furnishings, household supplies, and repairs
5. Transportation Auto payments, insurance, operating costs, maintenance, repairs, and public transportation
6. Health and Personal Care Medical and dental expenses, medications, eyeglasses, health insurance, and personal care costs
7. Recreation and Education Books and other reading materials, theater tickets, concerts, vacations, school expenses, hobbies, and club dues
8. Gifts and Contributions Charitable contributions and personal gifts
After savings, two types of living expenses must be considered: fixed and variable expenses. Fixed expenses are costs that occur on a regular basis and are for the same amount each time. Examples of fixed expenses are rent, mortgage payments, and insurance premiums.
Variable expenses involve living costs that differ each time and may not be as easy to estimate. These types of expenses include food, clothing, and utilities. Some variable expenses, such as medical and dental costs, occur less often and may be large when they do occur. Such expenses must be provided for in the budget.
The amount budgeted for savings and other expenditures is referred to as an allowance. An allowance is the amount of money you plan to use for a certain budget category. Although budget categories can vary for different situations, eight main divisions are commonly used.
1. Savings Savings accounts, government bonds, stocks, and other investments
2. Food Food eaten at home and meals eaten away from home
3. Clothing Clothing, shoes, dry cleaning, and repairs
4. Household Rent, mortgage, property taxes, insurance, utilities, furnishings, household supplies, and repairs
5. Transportation Auto payments, insurance, operating costs, maintenance, repairs, and public transportation
6. Health and Personal Care Medical and dental expenses, medications, eyeglasses, health insurance, and personal care costs
7. Recreation and Education Books and other reading materials, theater tickets, concerts, vacations, school expenses, hobbies, and club dues
8. Gifts and Contributions Charitable contributions and personal gifts
At this point, ask yourself, “How much should I set aside for each category?” Planned spending for various budget categories will depend on income, family size, ages of children, cost of living in your area, and work-related expenses. It will also depend on personal values, needs, and goals. A cash flow statement, similar to Figure 16-2, can help you develop budget categories.
Other help for developing a budget can come from government reports on family spending or from articles in magazines, such as Kiplinger's Personal Finance and Money.
Maintain Financial RecordsAfter planning a budget, individuals and families should record their income and expenses to find out if the plan is working. An example is shown in Figure 16-5. The first line shows the monthly income available to the family ($8,575 after taxes and other paycheck deductions) and the budget allowances for each category.
During the month, entries for expenditures were recorded. Because the family pays most bills by check, a checkbook is a reference for the information needed to prepare the income and expense summary.
Evaluate Your BudgetAll columns were totaled at the end of the month. Actual spending is compared with the budgeted amounts. Any difference between these amounts is a budget variance .
If actual spending is greater than planned spending, such as for the “Household” category, it is referred to as a deficit . When actual spending is less than the budgeted amount, as with the “Food” category, a surplus occurs.
A category-by-category comparison allows you to find areas where changes in the budget may be appropriate. A variance in the actual amount spent and the budgeted amount does not always mean a change in your spending plan is necessary.
Your budgeted amount may still be appropriate with a slight deficit or surplus occurring every few months in some categories. If you expect necessary higher or lower spending in a certain category, a change in your budget is probably needed.
SUCCESSFUL BUDGETINGEffective budgeting will be an ongoing learning process for you.
Characteristics of an Effective BudgetThe following are common characteristics of a successful budget.
handwritten documents. There are also people who try to keep their budgets in their heads. There are advantages and disadvantages to each format.
Money management software, cell phone applications, and financial websites offer budgeting tools. Although there are wide variations among the tools available, they are generally easy to use, provide guidance and organization, and utilize built-in calculators.
Handwritten budgets have the advantage of being inexpensive. They require nothing more than pencil and paper, although some people use a calculator or spreadsheet to help with calculations. For people with a single source of income and few expenses, a handwritten budget might be a good choice.
Some people choose to use their checkbook register and bank statements as a substitute for a budget. These documents allow the user to pay bills and monitor deposits and balances, but there is no mechanism for financial planning.
The idea of keeping a budget in your head is appealing to some people because of its simplicity. However the possibility of mistakes is greatly reduced when budget information is documented on paper or in an electronic file.
Your decision for a budgeting system will depend on your personal situation and your personal preferences. Most important is choosing a method that provides accurate and timely information for helping you achieve your financial goals.
Other help for developing a budget can come from government reports on family spending or from articles in magazines, such as Kiplinger's Personal Finance and Money.
Maintain Financial RecordsAfter planning a budget, individuals and families should record their income and expenses to find out if the plan is working. An example is shown in Figure 16-5. The first line shows the monthly income available to the family ($8,575 after taxes and other paycheck deductions) and the budget allowances for each category.
During the month, entries for expenditures were recorded. Because the family pays most bills by check, a checkbook is a reference for the information needed to prepare the income and expense summary.
Evaluate Your BudgetAll columns were totaled at the end of the month. Actual spending is compared with the budgeted amounts. Any difference between these amounts is a budget variance .
If actual spending is greater than planned spending, such as for the “Household” category, it is referred to as a deficit . When actual spending is less than the budgeted amount, as with the “Food” category, a surplus occurs.
A category-by-category comparison allows you to find areas where changes in the budget may be appropriate. A variance in the actual amount spent and the budgeted amount does not always mean a change in your spending plan is necessary.
Your budgeted amount may still be appropriate with a slight deficit or surplus occurring every few months in some categories. If you expect necessary higher or lower spending in a certain category, a change in your budget is probably needed.
SUCCESSFUL BUDGETINGEffective budgeting will be an ongoing learning process for you.
Characteristics of an Effective BudgetThe following are common characteristics of a successful budget.
- Must be realistic. It should reflect current income and planned spending.
- Should be flexible. When unexpected expenses arise, your spending plan should be able to adapt for these living costs.
- Should be evaluated regularly. Every few months, evaluate the budget to determine whether it still is appropriate.
- Must be well planned and clearly communicated. All family members should discuss financial goals, wants and needs, and plans for spending.
- Should have a simple format. If it is too detailed and difficult to understand, family members may not be willing to use the spending plan.
handwritten documents. There are also people who try to keep their budgets in their heads. There are advantages and disadvantages to each format.
Money management software, cell phone applications, and financial websites offer budgeting tools. Although there are wide variations among the tools available, they are generally easy to use, provide guidance and organization, and utilize built-in calculators.
Handwritten budgets have the advantage of being inexpensive. They require nothing more than pencil and paper, although some people use a calculator or spreadsheet to help with calculations. For people with a single source of income and few expenses, a handwritten budget might be a good choice.
Some people choose to use their checkbook register and bank statements as a substitute for a budget. These documents allow the user to pay bills and monitor deposits and balances, but there is no mechanism for financial planning.
The idea of keeping a budget in your head is appealing to some people because of its simplicity. However the possibility of mistakes is greatly reduced when budget information is documented on paper or in an electronic file.
Your decision for a budgeting system will depend on your personal situation and your personal preferences. Most important is choosing a method that provides accurate and timely information for helping you achieve your financial goals.