Tip #221 - Create Your 2010 Budget. After a few days of kicking around your financial goals for this year, you should be ready to write down a formal budget. If you had a budget for last year, this exercise should be relatively easy for you. If you are new to budgeting, then it will take a bit longer the first time you set one up. Ideally, a budget can be set up in an electronic spreadsheet. This way when you tweak the numbers, it is easy to change and adjust other categories. But if you aren't comfortable with that technology, then a paper and pencil budget will work just fine.
So how do we create a budget? Most people do their budgets monthly, but there is no rule that says it has to be done that way. If you want to do a weekly, bi-weekly, bi-monthly, or quarterly budget, that could work, too. A lot depends on your pay schedule and your expenses. Since most people get paid once or twice per month and bills are often due once per month, that seems to be the easiest, but it's not set in stone. If you decide on a monthly budget, start listing the categories that you pay out each month, starting with the fixed categories and biggest categories, such as housing and utilitie. Fixed categories are those that cannot be changed easily and are often necessities, but not always. Examples would include mortgage/rent, transportation costs, electricity, and food. After listing the fixed categories, list those that are more flexible such as cable tv, cell phone, and vacations. Lastly, list those that are very flexible such as entertainment and miscellaneous. What's flexible in one person's budget, however, may not be as flexible in another's so list it according to your needs.
After listing the categories, write down the amount you spend in each category. Some amounts are easy to come up with such as rent or mortgage. While some take a bit of figuring out. Insurance is usually paid just twice a year; water four times per year. Make sure you calculate your yearly amount for these categories and divide by 12 to get your monthly cost. Electricity, for example, usually varies quite a bit from winter months to summer months. Go over your past year's bill and average out the yearly cost and divide by 12, adjusting for whether you will increasing or decreasing your electricity use this year or if rates have gone up. Still other categories will be more challenging to figure out and will require some guess work. How much do you need to allocate to the gifts category each year? How much do you spend on your pet?
Other things you want to include in your budget is savings categories such as car savings, retirement savings, etc. and debt repayment categories. The amount in these categories would include how much you want to save each month in each of these categories. If you owe money on a loan, include those too: car loans, credit card debt, school loans, etc. The amounts in these categories would be how much you want to pay back each month on these loans.
When you are done, your budget should look something like this:
Retirement Savings: $500
College Savings: $500
Car Savings: $100
School Loan: $350
You need to then add up your expenses and compare that against your monthly income. If your expenses exceed your income, you need to adjust your expenses somewhere. If you are set on your savings goals, then you need to cut something else out like entertainment or vacation. If your income exceeds your expenses, then you can allocate more to one or more of your categories.
Notice I do not have taxes or health expenses on my budget. You can include those or not. If you include then in your budget then you would use your gross income to figure out the budget. If you don't include them, you will use your net income after taxes and other payroll expenses are taken out of your company paycheck. Either way would work.
In Real Life (IRL) - My husband and I worked on our 2010 budget last night - a little later than usual since our impromptu trip to Florida. Using our last year's budget, it was a breeze to go through this exercise. Since we fell short on our gifts category last year, we upped that by 50 percent. We also took away the pet category since our dog passed away last April. We are keeping our savings goals the same - for retirement and college. We reduced the costs of activities for the kids. I was feeling overwhelmed running them everywhere and I didn't feel the girls were getting much out of their dance classes, so we dropped those. However, since my son will be turning 3 this year, we upped the amount for camp and summer activities now that he is eligible to attend. I reduced our clothing expense since we didn't seem to be spending as much as I budgeted last year. And I upped our cellphone expense because my husband's job stopped payng for his cell phone. Overall, it took us about 45 minutes to go through our budget, using our last year's copy.
For now, we are working on the assumption that I will not start working this summer or fall. We know it can change, but until we know any details, it would be too difficult to make a budget on so many unknowns. Should I get some work later this year, our budget will have to be adjusted to account for extra preschool classes, and we'd probably put more towards savings for some short-term goals like a new car, a Bat-Mitzvah, and braces. Lastly, we expect some hefty housing costs to fix our leaky basement. That will be coming out of some money we had set aside for that purpose and not our yearly budget. Here is our budget. It is based on our net income after taxes, health insurance, and our 401(k) donation.
Item Monthly Payment
Cell phones $35
Car Insurance $125
Summer Camp $150
Condo Loan $415
Education IRA $500
Have you created your yearly budget yet? For other ways to save money this year, check out Frugal Fridays.