You can create an information-rich personal budget using a variety of features beyond a simple list of income and expenses. A budget can help you plan your expenses for the year, determine if you need to cut back your spending, and project and update how much money you might have at the end of the year. Understanding the different features used in budgets will help you create one that helps you keep track of your finances and let you meet your plans for savings, retirement, a home down payment, a college fund or vacation.
When you create a budget, you list your anticipated income and expenses. In addition to your salary, include any other sources of income you will have, such as interest earned on your cash, dividends or increases in stock values, gifts from parents or grandparents, a bonus or a windfall from a garage sale. If you expect a tax refund, you can adjust last year’s budget to reflect your taxes and year-end position more accurately, or record the refund as income in the current year, since you’ll have it available to spend.
Expenses should include all cash outgo, including interest, fines, penalties and service charges. If you use a credit card to pay bills, be careful not to double count expenses. For example, if you buy $1,000 worth of patio furniture in April, then make a $500 credit card payment in May that covers part of the April purchase, don’t record the $1,000 expense in April and the $500 credit card payment in May. To make sure you keep cash on hand to make the May payment, you can record $500 in April and $500 in May.
Formulas that track income and expense, average your monthly expenses and project annual performance are important features of personal budgets. In addition to a “Total” column that shows the total amount you spend and bring in, create an “Average” column that tracks your income and spending by monthly average. Use this column’s number to create a “Projected Annual” column that shows how you will end the year, based on your current spending and income. For example, if you spend $100 on electricity in January, $80 in February and $90 in March, your average monthly expense for electricity for those months will be $90. Multiplying this number by 12 in your “Projected Annual” column will give you a total annual expense of $1,080.
If you are saving for a home down payment, college payment or other discretionary items, put your monthly contribution in your expense section because it will be a cash outgo. Recording savings goals — even for a vacation or flat-screen TV — as expenses will help you stay on track with your other discretionary spending.
If you don’t record these items as expenses, intending to make the purchase after you have enough money saved, you may see cash piling up in your bank and not control other discretionary spending, such as what you spend on movies, clothes or dining out. If you are self-employed, include monthly contributions to your quarterly income tax payments to ensure you have enough for those payments every three months.
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