Your dynamic lifestyle will benefit from a dynamic budget, or one that changes as your year progresses. The more effort you put into your budget, the more you can do with it, including tracking spending, adjusting planned expenses and savings goals and projecting year-end numbers. In addition to basic income and expenses, your household budget should include formulas that adjust your savings and spending levels to help you adequately feather your nest.
An important start to any budget is your list of fixed expenses. These are expenses you have each month in the same amount. A car payment, rent or mortgage, cable or Internet bill, 401(k) or flexible spending account contribution, student loan payment and other regular payments are fixed expenses. For budgeting purposes, total your quarterly or semiannual fixed payments, such as insurance premiums, and divide them by 12 to let you see your average monthly expenses.
Variable expenses occur each month, but vary in size, such as groceries, utilities, dining out, gasoline and phone bills. For planning purposes, estimate a monthly average for these expenses so you can make annual projections that will help you set savings levels.
Necessary vs. Discretionary Expenses
You might think that morning cup of Joe is a necessary expense until you add up the cost and see its effect on your budget. If you need to cut spending at some point in the year, you’ll first look at your variable expenses, since fixed costs are usually obligations you can’t easily cancel. However, some variable expenses are necessary, such as groceries and phone. Highlight which of your expenses are discretionary, such as hair and nails, entertainment, dining out and clothing, so you’ll be able to quickly identify where you can start making cuts.
Add all of your income sources to your budget if you want to track your net worth during the year. This would include salary or wages, bonuses and commissions, interest earned, capital gains, employer 401(k) match and gifts from the folks. If you’re using a budget to control your spending, only include income that goes into your savings or checking account to help guide you.
Don’t wait until you have piles of money in your checking account to decide what to do with it or you might be tempted to blow it on impulse purchases. Your budget should include savings categories, treated as expenses, so you set aside money each month to reach your goals. Savings categories include retirement, home down payment, kids’ tuition, vacation, emergency fund and other needs and desires. If you think you have plenty of time to save for retirement, guess again. Almost half of Americans aren’t contributing to a retirement plan, according to a 2012 survey by the Life Insurance and Market Research Association. Following on the heels of that study, the Wider Opportunities for Women research firm found that approximately 9 million seniors are unable to afford basic living expenses.
If you don’t have a crystal ball, create a budget document that projects your income and expenses during the year to let you know if you need to make adjustments. In addition to including columns that simply add your expenses as they occur, add columns that show your monthly average spending during the year and project your year-end income and expenses at your current spending levels.
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