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Money Coach

Have you created your budget for 2010?

There are few personal finance tools more powerful, more necessary … and more unused … than the household budget. Few would attempt to run a business without a financial plan that charts the path between success and disaster, but it is far too common for individuals and families to blindly spend their way through the year without first creating a household budget.

Have you ever reached the point where you can't make a payment on a large bill or encountered an unexpected expense without having the available cash to make the payment? This happens to everyone. Having a well thought out, realistic and effective household budget can ensure that those stressful financial events happen less often, and when they do (surprises are a fact of life), a monthly budget that plans for the unexpected can help make sure that there is money left over for such events!

The fact is that a lot of personal finance problems can often be avoided entirely by the use of a realistic and effective household budget. Just as in a business – your personal finances must function “in the black,” or face the consequences – bad credit, an inability to meet our obligations and bankruptcy follows if it does not. The concept of budgeting is simple:

1) Calculate your income
2) Subtract your expenses
3) Plan for any long term expenses (and save a little each month to account for them)
4) Plan for the unexpected

Remember: You should always have money left over once you subtract your expenses from your income. Plan your budget over a long enough period of time so that the short term ups and downs are accounted for! For example, if you get paid on the first and third weeks of a given month, but the electric bill is due in between, a budget that plans weekly will likely show a negative balance for week two, but be “in the black” for the month. Planning your budget over at least several months can help you know when you have extra money, when to save, and when to defer bills or pay them early.

Your first step in creating an effective household budget is to establish the framework that you will use … and can be as simple and low-tech as a handwritten column of figures. You can cheaply purchase a financial program for your computer such as Intuit's Quicken software or Microsoft Money. If you possess the expertise, you can design your own (a spreadsheet program such as Microsoft Excel is useful), or you can use one of the many free budget templates available on the Internet. An excellent template is available from the Microsoft Office Online site at:

Using the template you have chosen, try to account for all of your spending and account for every dollar you spend. It is a good idea to keep receipts or carry a notebook, making note of every expenditure for a month or two.

Once you've got a good list of all of your typical monthly expenses, check it over carefully for anything you might have forgotten. You probably want to add a “miscellaneous” expense category, just in case there is anything small you've forgotten … don't make it too large … just enough to account for those trips to the convenience store, or the occasional surprise for your spouse.

Decide what time period to use. Usually, this corresponds with your pay cycle. If you get paid every other week, plan your budget accordingly, and fit your bills and expenses into your income cycle.

Create your budget. For those columns where your bills are higher than your income, see if there are ways to reduce your expenses or plan on paying some of those bills early or defer them (if possible) to a later date. For those columns of your budget where you have extra income, include a deposit to savings (you can always pull money out later if you need it). Establishing a savings account and using it helps to avoid those unpleasant financial surprises later in the year!

Once you have created your budget … stick to it and don't give up! If a major change takes place during the year, take the change into account by repeating the budget process with the new information. Your most important tool for personal financial success is to be realistic and to stick to your budget.  If you plan on saving $100 each month and you couldn't meet that objective in a given month, try again the following month! Analyze your spending to see if you can find out why you weren't able to meet your goal.  The more you come to understand the budget you have created, the better you will get at  sticking to it and meeting your financial goals.  

Good luck!

Published Dec 28 2009, 09:34 AM by moneycoach
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