Keeping Track:

There is only so much money from month-to-month. Question: where does it all go?

A sizeable portion pays for housing, food and basic living. Another portion pays for transportation. But where does the rest go?

Budgeting allows you to track your monthly expenditures so that you can plan key savings strategies for important short- and long-term goals.

Limits Your Spending:

Having a financial budget may find that about 5-10% of your total spending may be for purchases that are not needed.

Think about it. What could you do with that extra 5-10%? Perhaps your future plans include buying your first home, going back to school, saving for your child's college, paying down debt or simply setting aside cash for a special trip.

A budget will identify expenses that can be cut so that you can set goals on making important long-term savings.

Discipline Yourself:

Your goal is to rid yourself of instant gratification (the symptom of credit card use). The budget sets guidelines on what and when items can be purchased.

Setting Goals:

Budgeting supports your financial goals, which may include:

— saving for your first home
— paying down debt
— preparing to go back to school
— planning for retirement

Good budgeting skills add these goals into the budget.

Prepare for Emergencies:

Question: if you were to lose your job, how long could you survive on available funds?

If you had to stretch those funds, what reductions can you make in your existing monthly expenses?

That is the key benefit of a budget. It helps prepare for emergencies with established expense reduction plans.

Your budget "cash in-flows" needs to be greater than your budget "cash out-flows"

Income:

The budget starts with how much money you bring home on a monthly basis. Income sources include:

— employment income
— alimony received
— investment income
— social security
— support payments
— savings

How much income should be allocated for the budget?

— your goal should be around 90-98% or less
— the remaining 2-10% of your income gets allocated for savings

(note: budget items are expressed in monthly terms)

link to our budget worksheet to estimate income

Housing Expenses:

Housing expenses will likely be your largest expense item, especially if you own a home. Housing expenses include:

— your mortgage payment with escrow (taxes, insurance)
— monthly rental payment if you do not own
— utility services (electric, gas, oil, water, sewage, garbage, etc.)
— telephone, internet, cable
— house repairs and maintenance

How much for the budget?

— about 32-35% of income if you own; 15-20% if you rent

(note: budget percentages can vary by region and situation)

link to our budget worksheet to estimate housing expenses

Transportation:

Transportation expenses include:

— auto loan payments
— auto insurance
— fuel expenses
— maintenance and repairs
— taxes, licensing
— parking
— public transportation

How much for the budget?

— about 9-12% of income

(note: budget percentages can vary by region and situation)

link to our budget worksheet to estimate transportation costs

Family or Personal Care:

Family care expenses include:

— family care insurance (health, disability, life, dental, other care)
— doctor, dental, eye care, hospital visits
— veterinarian expenses
— prescriptions and over-the-counter medications
— child care
— elder care
— health clubs

How much for the budget?

— about 8-19% of income; 15-25% for full child/elder care services

(note: budget percentages can vary by region and situation)

link to our budget worksheet to estimate personal care expenses

Living Expenses:

Home living expenses include:

— food
— home living supplies
— school and work lunches
— snacks, vendors
— clothing
— education-related expenses
— home services (cleaning, gardening)
— postage and paper supplies

How much for the budget?

— about 27-35% of income

(note: budget percentages can vary by region and situation)

link to our budget worksheet to estimate your living expenses

Family Recreation:

Recreation expenses include:

— dining out
— movies out and rentals
— outside entertainment
— cigarettes, beer, wine, liquor
— birthdays and holidays
— vacation travel
— weekend, day trips
— gambling, lottery tickets

How much for the budget?

— about 4-6% of income

(note: budget percentages can vary by region and situation)

link to our budget worksheet to estimate recreation expenses

Obligations:

Obligation expenses include:

— credit card payments
— student loan payments
— home equity line or loan payments
— personal loan payments
— alimony, child support payments
— judgment or liens
— other assessed taxes
— charitable donations

How much for the budget?

— about 18-28% of income (your goal is to reduce this percentage)

(note: budget percentages can vary by region and situation)

link to our budget worksheet to estimate your obligations

Savings:

Savings include:

— 401K contributions
— IRA contributions
— investments
— savings (personal, college, retirement)

How much for the budget?

— about 2-10% of income (goal is to increase this percentage)

(note: budget percentages can vary by region and situation)

link to our budget worksheet to estimate your saving needs

Your spending plan defines the numbers that goes into the budget to achieve your goals

Step 1: Identify Your Income

You first step is to identify and segment your income sources as steady or temporary income.

Steady incomes refers to employment, social security, support payments, pensions, and investment trust income that is steady and on-going. These income payments are somewhat insured to continue for the foreseeable future.

We understand that income is never permanent — you can lose your job or find yourself fighting to retain your support payments. But for spending plan purposes, these steady streams of income will be used for setting up your budget.

Temporary income includes income that is limited such as unemployment benefits, money from relatives, service payments for babysitting, yard work, housing cleaning, etc.

These temporary incomes are flexible and should be omitted from your spending plan. Consider temporary income as extra savings that can help achieve your spending goals.

Step 2: Estimate How Much You Spend Each Month

Start by downloading this Expense Recording Worksheet

It lists categories with individual expense items.

You may also use an Excel® or Lotus123® workbook: click here

Take the Expense Recording Worksheet and record every expenditure you make during the month. This includes food, gas, utilities, loan payments, etc. If you have a one-time annual payment that covers an expense for the entire year, divide it by 12 and place it under the category listed.

Keep a good record of all cash, check, and credit card payments. This list will be used for planning your budget in Step 4.

Understand your fixed expenses, such as:

— rent or mortgage
— household bills
— loan payments
— insurance payments

Fixed payments are expense items that must be accounted for monthly and become your first priority when setting up your spending plan.

Understand your flexible payments, such as:

— food and home living supplies
— clothing
— transportation (fuel, repairs)
— medical care
— recreation and entertainment
— gifts, donations

Flexible expenses are "variable". These expenses can be reduced and in some cases eliminated in order to meet your spending plan.

Step 3: Define Your Spending Goals

Identify what you are looking to accomplish with your spending plan. First define your short-term spending goals such as:

— holiday gifts
— new entertainment center
— upcoming education expenses
— next summer's vacation
— other

And then define your long-term goals:

— buying your first or second home
— saving for your child's education
— planning retirement
— paying down debt
— other

For each goal, estimate the cost and the amount of time you need to achieve your goal. The list will be used to prepare your budget.

Use this form to list and estimate your spending plan. The estimated Monthly Savings Allocation is the savings target you need to hit each month to achieve your goals:

Step 4: Plan Your Budget

After making a record of your expenses for one month, take the Expense Recording Worksheet and budget your expenses for the month using our online budget worksheet.

Go to the online budget worksheet

The objective is to build a budget where you can save each month about 2-10% or more of your total income to achieve your short- and long-term spending goals.

Step 5: Adjust Your Spending Plan

Now comes the fun part — adjusting your budget allocations to meet your short- and long-term savings goal — based on the spending allocation noted under Step 1.

Note that fixed expenses cannot be adjusted by much. But flexible expenses can be reduced and in some cases eliminated as needed. You may need to use the Expense Recording Worksheet to compare your actual expenditures with your budget.

Another popular method is to set aside income at the beginning of the month for the budgeted expenses. You may do so by accounting notation, money software, or storing the money in separate envelops or jars marked housing, transportation, obligations, etc.