One of the best tools for managing your money is to use a budget or spending plan that reflects your family’s true expenses. But how do you prepare a budget that is more than just a wish list, or merely estimates of what it costs your family to live each month? Let the trumpets sound – budget help is on the way!
Start by calculating your monthly net income accurately
It all starts with how much money you have to spend each month. Net income is your “take home pay,” after deductions are withheld from your paycheck, or other income received. If you are a two income household, add together all take home pay for a precise starting point.
Be sure you are NOT using your gross income figures. Gross income is the total amount of money you receive or earn each month BEFORE deductions are withheld. Examples of deductions include federal, state, and local income taxes, plus taxes for Social Security and Medicare.
There are also voluntary deductions for medical and dental plans, retirement contributions, child care costs, child support, union dues, etc. Your take home pay (or net income) is what is left over after all your deductions. This is the amount you are actually paid, so be sure to look at your paystubs for the correct income numbers.
Next, think about how often you are paid. If you are paid twice a month, simply add your take home pay from the two paychecks to arrive at your monthly net income. If you are paid every two weeks, you actually receive 26 paychecks a year, or two “extra” paychecks. If you choose, you can simply allocate those two paychecks to your emergency savings (more later).
Or, put the extra paychecks in a separate account to use 1/12 of the total each month for your household expenses. Keep in mind that unless you save this money somehow, you will only have extra cash twice a year, not every month when you may be counting on it.
Create a household budget or monthly cash flow plan
Now that you have determined how much money comes in each month, the next step is to calculate where and how much you are spending on various items.
Unfortunately, most of us UNDERESTIMATE how much money we really spend.
The only way to be sure about where your money goes is to track every dime you spend for at least 4 weeks. There are several ways to track spending, but the simplest one is to jot down each purchase in a notebook with the amount, and what the purchase was for. You can also download an app to your cell phone that will track spending. (Click here to get our Expense Tracking Form.)
Another way is to reconstruct expenses by reviewing bank statements if you pay bills by debit card, writing checks, or through automatic withdrawals from your accounts. When you use cash, save your receipts so you don’t miss any expenditures.
Add all these expenses together to find out how much money you need to sustain your household’s monthly cash flow plan. Your budget should contain a variety of expenses including housing, utilities, transportation, food, insurance, healthcare, installment loans, leisure, child-related costs, and miscellaneous like cleaning and personal care items.
Establish two savings accounts
The first account to set up is an emergency savings account. Think of emergency savings as your “safety net.” The idea is to be prepared for life’s little bumps. Having this safety net will prevent going into debt from using credit when things go wrong. Add financial windfalls, or a portion thereof, like tax refunds, gifts, etc. to boost this account. (Click here to read more about ways to increase savings.)
The best way to save on a regular basis is to have money automatically transferred from your checking account to a savings account. This is called “paying yourself first” and prevents you from spending the money on something less important before you get a chance to save it.
The second savings account to set up is for periodic expenses. A periodic expense is one that is still vital to your household but does not arise every month. Examples of periodic expenses include insurance payments or taxes that are paid quarterly, semi-annually, or annually. For example, let’s say your property taxes are $1200 a year. Divide the amount by 12 months to arrive at the figure you should save monthly. In this case, that amount is $100.
Saving for periodic expenses allows you to pay those bills in full when they are due without having to scramble or pull cash out of your emergency savings. Ideally, you should save this money in a separate account from your checking or emergency savings so you are not tempted to spend it or forget that the money is earmarked for something else.
Want a little help setting up a budget?
Our Financial Counselors at LSS are here to help you achieve your financial goals. They will create an action plan for you to stick to your budget, save money, and conquer your debt. Call us today at 888.577.2227 or click below to get started online now. Don’t wait to improve your financial situation – take action today!
Author Barbara Miller is a Certified Financial Counselor with LSS Financial Counseling and she specializes in Bankruptcy Education and Counseling.
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