Personal financial management is something that often alludes the most focused and ambitious among us. Below is a very simply overview of some basic ideas I suggest to clients who are struggling with balancing their books. Its a method that should work for almost anyone. By way of disclaimer, I am not recommending any investments, and I am not a professionally licensed financial advisor – this article is only meant as an educational description of a method for creating a household budget.
I use a month as a basic unit, since most folk’s reoccurring costs (bills, rent or mortgage, etc…) are broken into monthly payments. It is easy to multiply it out for a year or break it up into 2 or 4 periods.
1st. it is essential to have a handle on your income. On a monthly basis, from one or multiple sources, you should be able to project your income.
On the top of a sheet of paper write the individual sources of your expected pay for the next full month. For Example:
- Full Time Job – Pay Period 1
- Full Time Job – Pay Period 2
- Misc. Income 1
- Misc. Income 2
- Investment Income
- Gifts, Etc…
Then tally them all up. This is your projected income for the month. It should be the limit of what you are able to spend in a given month.
EXPENSES, DEBT, & SAVINGS
I work with 3 categories of expenses – or draw downs on your income. The 1st I address is mainly set as goal – your savings. Its a piece of advice I picked up from the old book The Richest Man In Babylon, which says, “pay yourself 1st.” I suggest that 10% of every paycheck, every source of income, should be transferred to your savings.
Your savings are your most important financial obligation, and building that as a reserve creates opportunity for investment (additional income), and provides a protection for you if you lose employment or suffer any other financial hardships. This initial transfer to savings isn’t for spending on vacation or luxury items, it is meant to both create financial protection for yourself, and overtime to create wealth – through investing, etc…
It doesn’t matter if you are taking home $20,000 a week or $400. Setting that 10% aside adds up over time and can make a huge difference for your future.
If you plan to invest you should certainly consult with a professionally licensed investment advisor.
After setting aside the 10%, create a list your necessary monthly expenses. This should include your rent or mortgage, essential utility bills, and the like. I’d also add to this section a minimum food budget. Eating healthy, and feeding your family are essential expenses. I find starting with a daily dollar amount (per person per day) is the easiest. It should be fairly easy to feed 2 people for $20 per day, but some budgets are tighter and others have more room. Commuting costs, known medical costs, costs associated with your home, all fall into this bucket.
Below your essential expenses you should address your debt, if you have any. If you are in debt, finding a way to eliminate that expense should be a top priority. If you are in over your head there are people out there who can help, but I would recommend calling your creditor and seeing if you can arrange more favorable terms. If you are in debt, stop using your credit cards or borrowing money. Living on the income you have is facing the circumstances of your life.
After debt, create a list for your optional lifestyle expenses – cable, the gym, memberships and subscriptions, entertainment, luxury shopping, eating out – all the things you spend money on, but which are not essential to your ability to live with your basic needs met.
Tally these up – 10% to Savings, Essential Expenses, Debt Payments, non-essential Lifestyle Expenses. You now have your total expenses.
- 10% to Savings
- Essential Expenses
- Gas & Electric
- Auto & Gas
- Lifestyle Expenses
- Luxury Shopping
- Eating Out
TOTALS & REMAINDERS
Subtract your Total Expenses from your Income. If the remainder is positive, great! I’d suggest setting additional money aside for savings, paying down additional debt, starting a vacation or holiday fund, or going out and having some fun.
If your Expenses exceed your Income its time to make a change. If you have no means of raising your income, you better buckle down. Minimizing Lifestyle Expenses, working out payment plans with creditors, and finding ways to minimize or shrink Essential Expenses can now be done, line by line on your budget.
- Total Income
- minus Total Expense
A NOTE ON SAVINGS
The 10% transferred to Savings from the start is meant to serve as a Reserve – money that is there when you need it. Unforeseen medical expenses, home or auto repairs, it is there to help when your income or essentials are negatively impacted.
When your Income is higher than your Expenses you have additional money to work with. For some people thinking about their long-term future the majority of this money will be used for retirement planning or children’s education. For others this money might be set aside for a vacation or special purchase. If you have debt it may make sense for you to pay down additional principal, reducing your monthly debt service obligation.