Budgeting

A basic budget plan is knowing how much income you will have, how much money you will spend, and how much money, if any, will be left over. Using the information available to you from your check register you only know how much money is available at that moment. It doesn’t inform you of how much you will need to get through till the next payday or if there will be enough money, after paying all your bills, to allow you to make that purchase you’re contemplating.

If you were paid a fixed amount once a month there is a very easy way to budget your money. You could take a stack of envelopes and label them with the names of all the bills and expenses you will need to pay during the upcoming month. They could be “Rent”, “Utilities”,”Car Payment”, “Food”, etc. Then you would place the amount needed to pay each expense into it’s envelope. When all the envelopes had the required amounts, the money left over, if any, is the “expendable”
money that you are free to spend on non-budgeted items.

As you paid each item you would obtain the required money from the proper envelope. At the end of the month any money left in an envelope could be redistributed along with the new months income and you would be ready to start over. Using this system you would always know how much money you had available by simply inspecting the envelopes. Any deviations from the “budgeted” amounts is quickly observed and corrections could be made.

While this type of budgeting is very simple, it is not practical for most of us. First, it requires that all payments be made in cash. This alone will eliminate the plan in all but a few cases. Also, most of us have an income that is spread out, in one form or another, during the month. A weekly pay period is an example that would make the above plan very difficult to operate.

An alternative to the use of actual envelopes would be to create your budget on paper. You could project your monthly income and create accounts from which to debit or credit money as bills are paid and income is received. The sample budget below explains such a written type of budget. But for us computer users paper is old fashioned and out dated.

This is a sample budget prepared by Dick and Jane who are both employed. Dick is paid weekly and brings home a check for $350.00 each week. Jane is paid every two weeks and brings home a check for $500.00 each pay day.

Jane sometimes receives an additional amount for paid overtime and Dick receives a bonus from time to time. However, since these amounts are not guaranteed, for budgeting purposes they are not considered. If and when the extra money is received it will be added to their income at that time.

Now, if you assume that Dick will be paid four times a month and Jane will be paid twice a month, their total combined net income appears to be $2,400.00 per month. But using this assumption, as many people do, is incorrect.

During the year Dick will be paid 52 times for a yearly net income of $18,200. Jane will be paid 26 times for a yearly net income of $13,000. Their combined yearly income of $31,200, when divided by 12 (months), yields a monthly income of $2,600.00. This is $200.00 a month more than the amount figured incorrectly above.

After arriving at their total monthly net income Dick and Jane compile a list of all their known monthly expenses. Here is Dick and Jane’s list*:

Mortgage payment – – – – – – – – – – – – – – – 550.00

Auto loan – – – – – – – – – – – – – – – – – – 280.00

Auto insurance – – – – – – – – – – – – – – – – 120.00

Auto expenses (gas, etc.) – – – – – – – – – – 100.00

Groceries ($100.00/week) – – – – – – – – – – – 433.33

Utilities – – – – – – – – – – – – – – – – – – 110.00

Telephone – – – – – – – – – – – – – – – – – – 35.00

Medical – – – – – – – – – – – – – – – – – – – 30.00

Loan payment – – – – – – – – – – – – – – – – – 25.00

Life/Health insurance – – – – – – – – – – – – 180.00

Entertainment – – – – – – – – – – – – – – – – 75.00

Savings – – – – – – – – – – – – – – – – – – – 100.00

Weekly Cash ($50.00/week)- – – – – – – – – – – 216.66

Total Expenses – – – – $2254.99

*(The budget categories listed here are to demonstrate a budgeting concept and are not meant to represent a complete list of budget categories for an actual budget. The list you use will be indicative of your unique expenses.)

Subtracting the total expenses from the total monthly income leaves them with a balance of $345.00. This amount is placed into an “expendable” account (on paper) and is the amount that Dick and Jane are free to spend each month on non-budgeted items.

To manage their newly created budget Dick and Jane need to do the following:

1. The first month’s budget is set up on paper showing each expense item and the “left over” amount in their expendable account.
   
   
2. At each pay period the amount received is placed in a checking account. If the amount received is the exact amount that was used to figure their budget, no notation is made. However, if the amount is greater or less than the figured amount, the difference is added to or deducted from their expendable account. It is very important that they account for each pay period in this manner. For example, Jane may take a day off, without pay, resulting in a loss of $50.00 for the pay period. When she receives her paycheck she must deduct the $50.00 from the budget’s expendable account. By the same token, if Dick receives a bonus of $100.00 one week, the $100.00 is added to the expendable account. In this way their budget is compensated for the loss or gain of income.
   
   
3. Once a week the weekly cash amount of $50.00, as provided in their budget, is withdrawn from their checking account. The balance of the weekly cash account at the end of any given month may end up having a balance, or be negative, depending on whether the withdrawal date occurs four or five times during the month. This variance does not need to be compensated for as it will even out over the course of the year.
   
   
4. As each budget expense is paid, the amount is deducted from the item’s budgeted amount. If the amount paid is less than the budgeted amount, a balance will remain. On the other hand, if more than the budgeted amount is paid, the account will go negative (will be less than zero). For expense items that have been configured using an average amount this is the normal case. The account will have a balance when the payment is less than average, and that balance will be available when the payment is greater than average.
   
   
5. Any payment for an item that is not listed in the budget is deducted from the expendable account balance. Any extra income, from any source, is added to the expendable account. The expendable account thus becomes a sort of savings account from which money can be withdrawn as needed.
   
   
6. At the end of each month Dick and Jane start over with a new piece of paper. The budget is again listed, but this time each item’s budgeted amount is added to the balance left over (if any) from the previous month. If a negative balance is shown, it is subtracted from the budgeted amount and the new amount is listed. If it becomes necessary, an amount of money can be transferred by subtracting a dollar amount from any account and adding the same amount to the account needing it.
   
   
7. If after several months it is noted that any budget item is repeatedly going over or under budget a correction needs to be made. The budgeted amount for the month is changed to an amount that is closer to what is actually being spent. Any change will, or course, change the amount credited to the expendable account at the beginning of each month.
   
   
8. By using their budget Dick and Jane are confident in the knowledge that they will never find themselves spending more money than what they will earn. They also are aware that no budget plan can work without their commitment and diligence.