It’s no secret that the U.S. economy is going through a great deal of upheaval these days. With the government taking control of the two largest funders of home mortgages, and major Wall Street players being sold or going bankrupt, these are scary times. While there is little we, as individuals, can do to affect the broad U.S. economic picture, we can protect our families by acting responsibly with our own money - and by careful budgeting.
If you are new to the workforce, or have never really lived on a budget, a good definition of it is: a system used to make sure your expenses, including savings, don’t exceed your income. A successful budget will help you minimize debt - and sleep better at night - but how do you determine what your expenses should be?
The starting point of your budget should be an analysis of your income and when you expect to receive it. Include any business or salary income, interest, dividends, child support, alimony and other regular payments you reasonably expect to receive throughout the year.
The next step in developing your budget is to look at your basic expenses, i.e. those that cannot be avoided. Housing, utilities, food, taxes and the cost of getting to and from work or school are examples of these. You can get a handle on them by first looking at your expenditures over the last three or four months, assuming they are representative of your normal spending habits. Try to include in the basics only those things that are necessary. This means that entertainment and other nonessential activities should not be included in this step.
Establishing your budget based on past history is a relatively simple process, but what if that has gotten you into a tight spot? How can you tell if your spending habits have been reasonable in the past? One way is to take a look at the Basic Family Budget Calculator provided by the Economic Policy Institute. No single tool can provide a complete set of factors to develop your budget, but this one offers insight into what it takes for a family to meet its basic needs in any given city. Example: according to the Basic Family Budget Calculator, a family of five (two parents and three children) in Washington, D.C. would require an annual income of $86,544 to meet its basic needs. This amount is broken down monthly as follows:
Perhaps the single greatest value from using a calculator like that of the Economic Policy Institute is that it provides guidelines based on the area in which you live. Using a tool like this can give you an idea of your basic needs and give you a starting point to building each individual budget item.
Once you have determined your needs, you should establish savings goals. Even if the goals are modest at first, developing good savings habits will enable you to begin to develop financial independence. As your income increases, so can your savings goals.
Only after you have made provision for your basic needs and savings can you develop a budget for your wants. Entertainment, eating out, more expensive clothing, a new entertainment system, and extracurricular activities for the children can be included in this category. Even a cell phone is a luxury if it’s not your only telephone.
Creating the budget may be the easiest part of the process - the real trick comes in following it! We suggest keeping track by using a columnar pad or computer-based spreadsheet. To be most effective, you should review your expenditures at least once a week. This will help you avoid overspending during the month and also give you a better idea of the pattern of your monthly expenditures. Looking at the pattern of your outgo can help you avoid overspending between paychecks.
Establishing a budget is one of the most important steps in taking control of your financial future. Although the concept is relatively simple, it requires making some informed and difficult decisions that can affect the quality of your life and that of your family’s. If you need assistance in developing realistic goals for your financial future, give us a call. We’re here to help you.
Have a great month!