Budgeting: LEARNING to Take Control of Your Money
Taking control of your money: A budget is a guide to help you meet current expenses and put money aside for both short- and long-term goals. Whatever your goals, a new vehicle next year, a new house in 5 years, your child's college education 15 years hence . . . your budget should be structured so that you can achieve your goals within the available time. Once your goals are set, select a budget period, a time frame for recording and then reviewing actual expenditures against predictions. Most people do this weekly or monthly, but your personal situation may make some other time span convenient.
Estimating your income: First, add up all sources of income, starting with your regular salary (or combined salaries in the case of a couple who both work). Include only what remains of your paycheck after all payroll deductions . . . taxes, Social Security, union dues, pension or insurance plans, and so on. Next, add up all other amounts you customarily receive, such as savings account interest, stock dividends, and rents. Include bonuses, commissions, tips, cash gifts from relatives, and income tax refunds only if you are sure of them. In estimating these items, use the minimum you expect to receive. If you are self-employed or work part-time or seasonally, base your estimate on the previous year, even though you expect to earn more. Add up the year's projected annual income, and then divide by the number of budget periods in a year to get a figure for periodic analysis.
Projecting your expenses: There are three broad categories. >1. Fixed costs. You must meet these expenses on a annual basis. They are not within your control; that is, you cannot reduce them unless you make a major change in your situation. They include rent, mortgage, or other housing payments; utility bills (for heat, gas, electricity, telephone); installment loan payments; tuition; taxes and insurance premiums (other than payroll deductions). >2. Savings: Base the amount you set aside during each budget period on the goals you hope to achieve. The first goal of every self-supporting adult or couple should be a nest egg for emergencies. How much you need depends on what other protection such as unemployment compensation or insurance coverage is available in case you lose your job or have health problems. The equivalent of 2 months' income usually suffices. >3. Variable expenses. The most flexible of your outlays, these include daily living costs... food and household supplies; transportation (including automobile maintenance and commuting costs); medical care not covered by insurance; household repairs and improvements; clothing; vacations; entertainment; gifts; charitable contributions. Some of the expenses in this category may take the form of a personal allowance, or pocket money, for each family member. You should also set aside an amount for unpredictable expenses, such as repair or replacement of appliances. If last year's records are inadequate for making an estimate, keep track of your spending for a few months to get a more realistic picture.
Adjusting expenditures: After you have made both projections, subtract expenses from income. If you have money left over, you can add it to your savings allocation. If expenses exceed income, review your spending to see what you can cut. Keep in mind that some costs are higher in certain periods than in others and may balance out over the long run. You may decide that some current expense is important enough to delay reaching one of your long-term goals. In trimming your budget, don't make unrealistic cuts that you won't be able to live with; they will ultimately sabotage your plan. Once you have established a workable budget, review it quarterly, annually, or whenever your financial circumstances change.
Finding out how much money you are worth: To determine your net worth, first list all your assets at their current value. Include checking and savings accounts, credit unions, time deposits, the cash value of your life insurance, the current value of savings bonds, how much you could withdraw from employee profit-sharing plans and retirement programs, and the current cash value of stocks, mutual fund shares, bonds, or other securities. Add in any accrued interest when listing the values of these assets. Also list the market value of your home and any other real estate you own. Include the value of your vehicle, household goods, jewelry, art works, antiques, and anything else you could convert into cash; evaluate items at the price for which you could sell them, not at their current retail price. Include any money you are owed and can reasonably expect to collect. Liabilities: Now list your liabilities: the current amounts of outstanding loans, such as mortgage and vehicle loans; how much you owe on credit cards, bank cards, and other installment debts; how much you owe in non-withheld income and real estate taxes; your college tuition commitments for your children; and all other outstanding debts and financial commitments. Total the two columns and subtract your liabilities from your assets. The result is your net worth.