Run your home like a business, which includes sticking to a well-planned budget, financial author Susan Urquhart-Brown advises. You can learn some valuable cash-budgeting lessons from the business world. The key to success is to make the budget comprehensive because the little things you leave out do add up and can cause you to blow the whole thing.
Cash Budget Basics
A cash budget is a plan to control cash inflows and outflows. In an accounting sense, it's more than just the paper bills and coins you spend. It refers to all money in and out. If you already use tax-preparation software, it probably has a budgeting component which is a good place to start. Otherwise, a simple spreadsheet will suffice.
Lessons from the Business World
Cash accounting and budgeting are financial tools in the business world that can work for your household. Businesses use cash budgeting for a certain period of time. For your household cash budget, you should create a budget for a full year. Though a company’s CFO may put together the corporate budget, a successful business shares it with key members of the accounting and management teams. Your household budget should be shared with all the players. Both spouses, and even older children, should have some understanding of budget basics and fiscal responsibility, so include everyone at some point in the process.
Businesses often have unpredictable monthly inflows, but you can probably rely on a yearly salary or wages. The first big step to your budget starts with the cash inflow. It’s important that you only include after-tax income, so take a look at last year’s tax return to see how much you get to keep after Uncle Sam takes his share. Include any non-wage income, such as rents or fixed income investments like bonds.
Cash Out, Recurring Expenses
After you budget your cash inflow, the next step is to pull out your checkbook and monthly credit card statements and take a hard look at prior spending. Look first at recurring expenses like housing, transportation, insurance, telecommunications and utilities. You probably already have a good grip on what you spend on these items. After you figuring out how much you spend, your next step is to see if there is whether there's any way to cut back and economize.
Cash Out, Variable Expenses
Recurring expenses often don’t vary much from one month to the next. It's other payments where budgeting gets tricky. Initially you might think that your transportation expenses include just your car payment and gasoline purchases. But you can’t leave out routine maintenance, parking, tolls or even car washes. Those might only be a couple of dollars in the meter here or a $20 oil change there, but over a year they add up. Don’t leave expenses out – no matter how small -- in any spending category. Again look at expenses from the prior year and create realistic line items in your budget. If you buy a lot of things with cash, your next step is to keep track of these expenditures for a few months by saving receipts or writing down expenses on a notepad. Those little expenses can be budget busters, so don’t eliminate this step from your budgeting process.
Don’t Forget to Save
A last step is to plan for savings and investments. Perhaps this should really be your first step! Whether you’re looking toward retirement, a new home, college expenses or even an emergency fund, you should include savings in your budget. Just like you wouldn’t leave food or housing out of a budget, savings should be considered an essential item that must be included.
Annabella Gualdoni has written newsletters and reports for corporations and nonprofits since 1994. She is a real estate professional and also teaches subjects including international cooking and travel, dating/relationships and personal finance. Gualdoni has a Bachelor of Arts in international development from University of California, Berkeley, a Master of Arts in international relations from Boston University, and a Juris Doctor from Boston College Law School.