New Mexico Urban Homesteader

Hello, I am A 50 Something, Prepper ;-}; former 60's Flower Child, don't believe in taxpayer subsidized special interest groups (political parties), DO believe in the Constitution and Bill of Rights (1st 10). Long time Independent & Informed Voter. Lover of the outdoors and firm believer that History Teaches - if only we will listen!

(No longer Urban or in NM. Now Rural in the mountains of Maine.)

This blog was started at the request of some dear friends that wish to become Preppers.

“No man who is not willing to help himself has any right to apply to his friends, or to the gods.”

Demosthenes (384–322 BC, Greek statesman and orator of ancient Athens)

Monday, January 11, 2010

Budgeting for Mere Mortals - Part 2

Making the Budget Requires Analysis of your Financial Health

Once you accomplish these prerequisite steps it is time to get down to the nitty-gritty of analyzing your income vs. expenses to create a budget. I have found that by creating the Wants vs. Needs list and the Moderation List before creating a budget, increases the success rate for the budget you do create. Creating a budget has several consistent steps no matter where you go to for information and ideas on budgeting.

Gather every piece of financial statement, bill and information you can on both income and expenses. Utility bills, credit and loan bills, investment statements, payroll stubs (that include all tax and benefit deductions you make), last year’s income tax information, bank statements, grocery receipts, clothing receipts, entertainment receipts, vehicle maintenance, gas receipts and the like. It is wise to have a year’s worth as this will give you the most detailed look at seasonal expenses that can be averaged out to monthly amounts for the budget. But in a pinch 6 months worth can be made to work. Just remember the more information, the more accurate your budget will be and the easier the budget will be to follow.

Create a detailed list of all your sources of income from the documents collected above. Think of this list as a table or spreadsheet. List the months across the top (columns) for the amount per month and the income source along the side or rows. Be sure to include any self-employed or outside sources of income. If your income is in the form of a regular paycheck where taxes are automatically deducted then be sure to use the net income, or take home pay amount and not the gross.

Create a detailed list of all your expenses. Again make a table or spreadsheet with months and expense type for each amount. It is here that some things you only pay once every 3-6 months or so, like life and auto insurance. Maybe your state has an annual vehicle inspection that must be done. Or you may have an annual medical physical or dental check-up. List these in the month they are due or you usually have them done.

Determine which expense and income sources are fixed and which are variable. Take each of the above sheets and put all the fixed first and then all the variable. For instance utility costs are variable, while auto insurance costs are fixed. If your salary is not based on hourly wages worked or commissions, then it is fixed, otherwise it is variable.

Basically fixed expenses and incomes are those that stay relatively the same each month and are required parts of your way of living. These are usually essential yet not likely to change in the budget from month to month.

Variable expenses and earnings are the type that will change from month to month. In the case of expenses this is where we looked at our Moderation items like utilities, groceries, gasoline, entertainment, eating out and gifts.

Add each year’s worth of expenses and earnings for the year, then divide by 12 to get an average monthly amount. This is your Estimated amount of income and expense, the first major figures for your budget. Do this for both your general overall and with the detailed individual expense and income types. Some items like auto insurance or property taxes you may only pay 3-4 times a year. No problem, the figure this calculation will give you is what you need to set aside each month to make those payments, be they every month or scheduled throughout the year.

These average monthly expenses and income figures will help you determine where you can and or need to cut expense, so that your budget can be realistic and easy to follow.

Closely study the average expense amount to the average earnings amount. This will help you to prioritize any excess in your expenses for Moderation and then re-allocation of the monies saved for other items that are important to you like retirement savings, accumulating food storage, a child’s college education or paying more on credit cards to eliminate that debt faster and the like.

If this comparison shows a higher expense column than income, you need to review your Moderation and Variable lists, make more cuts and see if this makes up the difference. If it does not, time to get really honest with yourself and re-evaluate your Needs and Wants to make even more changes. This is where you may find you need to downsize your home, or sell your new vehicle to purchase a cheaper model or used version or downsize your annual vacation to one much less expensive. In really extreme discrepancies, you may need to utilize a financial or debt counselor to assist in building a plan to get these figures equal. If this is the case always check with the Better Business Bureau before selecting your advisor.

Put the Budget In Writing

This is where a spreadsheet or table document will be most helpful. It is far easier to stick to a budget if you can see it and track your progress towards your goals easily.

There are many budgeting worksheets and the like on the internet and freely offered by banks or other financial institutions. However, I have found that the K.I.S. (Keep It Simple) principle is the most successful. I prefer Spreadsheets, like an Excel Workbook, for this as you can have all the general and individual detailed “tables” or forms in one file. However if you would rather use word processor tables – go for it.

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