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Budgeting For Our Personal Lives
Fortune 500 Budgeting For Our Personal Lives
by: Deborah Carraro
January and February are traditionally busy months in the financial industry as
many New Year's resolutions typically include the goal of becoming debt free or
saving for a major purchase. While many of our clients understand the importance
of getting professional help when managing their business bookkeeping, only a
few think to ask for our services in managing their personal finances.
In the business world, a budget is a financial framework that provides checks
and balances to prevent overspending and ensures the availability of funds
should the company run into unexpected trouble and requires capital. These same
principles can be applied to our personal lives.
We are still close enough to the Christmas holidays to understand how easy it
can be to overspend. Presents for the kids, dinners with family and friends, new
clothes for the New Year's Eve party all can add up to significant debt come
January. I'm reminded of a Visa commercial that typically gets a lot of airplay
in December: The postman comes bearing the monthly bills. The Visa statement is
opened showing a large listing of purchases all with zero balances and the
recipient can't believe his luck and faints from the shock. The commercial
advertises the Win What You Buy Contest. The more you buy, the more chances you
have to win. A certain recipe for financial disaster!
While statistically speaking I don't know the chances of winning the Visa
promotion, I haven't met or read about one person who has. We shouldn't base our
spending on the chances of winning our purchases or even the lottery. With a
little common sense and a trusty calculator, you can manage your spending and
save for the future and for unexpected expenses - and feel like you've won the
lottery!
Fortune 500 companies rely on budgeting and financial reporting. CEOs of major
corporations do not make a move without consulting their financial plan. Revenue
and expenses are carefully tracked and estimates are created for variable
expenses. Corporate debt is studied with the goal of reducing amounts owing
without incurring additional debt. Money is diligently earmarked for future
expenses and “rainy days.” Almost every financial expenditure is determined a
year before incurred – a business cannot thrive without actively managing its
cash flow. Most people understand that business success relies on creating a
budget and sticking to it. I'm here to tell you that personal success does too.
Everyone talks about setting up a budget and sticking to it, but how do you
really go about figuring out what your budget is, or should be?
There are a few simple steps to creating a personal budget. We’ll use the
example of Steve, a computer technician.
1. Calculate your income
Calculate your monthly household income from all sources: salary, investment
income, pension funds, lottery winnings - both yours and that of your spouse or
partner.
For example, Steve earns $50,000 after taxes annually. He has no other income.
Dividing by 12, Steve calculates his monthly income as $4,166.67.
2. Determine your ESSENTIAL expenses
Steve has certain fixed monthly expenses. He lists them as:
Mortgage payment
Groceries
Automobile lease payment
Automobile Insurance
Utilities
Fuel
3. Calculate a monthly cost for ESSENTIAL expenses.
The expenses that Steve has deemed essential are a mix of fixed and variable
costs. He notes the fixed payments first, assigning their values as:
Mortgage payment $1,300
Automobile lease payment $ 385
Automobile insurance $ 130
To better gauge his variable expenses, Steve creates an expense log and records
all his purchases for the two-month priors to setting up his budget. He also
examines his old utility statements to determine his average expenses and is
able to assign the following values:
Groceries $ 200
Utilities $ 400
Telephone (incl. Long distance) $ 50
Fuel $ 250
Knowing that his variable expenses are based on an average of prior expenses,
Steve sets aside $200 per month to cover periods when expenses may be higher
than his estimate.
Steve calculates his monthly ESSENTIALS cost as $2,915.00
4. Determine and calculate your non-essentials
Steve examines the spreadsheet he created for step 3 and identifies some other
common expenses.
Entertainment $ 50
Meals (incl. Daily coffee) $ 100
Gifts (weddings, birthdays, etc.) $ 100
Books and magazines $ 50
Miscellaneous $ 25
Steve’s monthly non-essential expenses total $325
Steve creates a new spreadsheet with the information he has calculated thus far.
He calculates his disposable income as:
Monthly income: $4,166.67
Less: ESSENTIALS $2,915.00
Less: Non-essentials $ 325.00
Disposable income $ 926.67
5. Establish monthly contributions towards debt elimination and savings:
Steve amassed some debt while in school and owes $5,000 on his credit line. He
would also like to purchase a vehicle rather than lease and plans to take a trip
to Europe in two years to visit family.
He decides on the following monthly contributions:
Debt $ 450.00
Savings $ 300.00
Steve deducts his monthly contributions from his disposable income and is left
with $176.67, which he decides to leave in his checking account to cover other
incidentals and miscellaneous expenses he may have overlooked. He makes a plan,
however, to transfer $500 to his savings account when the balance in his
checking account exceeds $1,000.
It’s easy to see that you can write out a plan yourself or use a software
package to set up a budget - no need to hire a professional accountant. It’s
important to know where your money is coming from and where it is going so that
you won’t have any unpleasant surprises – and maybe just enough money left over
at the end of the day to buy that lottery ticket you’ve been hoping for!
About The Author
© 2005 Deborah Carraro
Deborah Carraro is a Virtual Assistant offering bookkeeping, web design, desktop
publishing and business consulting services. She publishes a monthly newsletter
Vascorp VA Advantage. To subscribe or find out more, please visit visit
http://www.vascorp.com/va
deborahc@vascorp.com
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