How to Start a Budget
self help article
by Karen Jones

Prosperity and financial wellbeing self help article:

You might think that devising a budget is difficult because income as well as expenses can vary throughout the year. Those who are self employed or who have seasonal work know about this.

Others rely on lump sum income such as a yearend bonus or a large tax refund. Expenses are low some months and high other months.

Examples: quarterly or semi annual insurance premiums, annual real estate taxes, automobile tags and license, and high winter fuel bills.

You know when they are coming due, but others expenses such as car repairs or medical expenses seem to come when you're least prepared to pay for them.

Is it possible to take all this variability and some unpredictability into account and finish a year without having spent more money than you took in?

YES, YES, YES, by making a budget for the entire YEAR and for every MONTH of the year. It is not hard as you might think.

Begin by taking a piece of paper and listing all your sources of income and the amount that you can expect to receive from that source during the next year.

The list will likely include your wages, income from a second job or gross receipts from a home business.

It might also include income from other sources such as child support payments, alimony, rents or royalties, interest or dividends.

List the sources on the left with a note as to the periodic amount and the frequency.

Multiply to calculate the annual amount on the far right, and divide by 12 for an AVERAGE monthly amount in the middle.

Now total the income in both the monthly column and the annual column.

Skip a line and start listing your expenses.

Be sure to list ALL of your expenses. For the quarterly/semi-annual and annual expenses make a note of the month(s) in which they occur.

It's important to be accurate here. Do not underestimate your expenses.

Base them as closely as you can on what you are actually spending and remember that some of your expenses will increase over last year. You will probably have to do a little research.

When you have all of your expense categories listed and have calculated the average monthly and total annual amounts for each, total each column. Compare it with the total income from above.

The expenses cannot exceed the income, and ideally you should strive to have some excess to put into a category for saving.

Having a category for "saving" is very important because it will help you build a cushion of safety for those months when the outflows exceed the inflows and also helps cover any unanticipated extra expenses.

Assuming that you do have more inflow than outflow the next step is to make individual budgets for each of the twelve months of the year.

To do this you will make a spread sheet. It can be on 13 column accountant's paper, or preferably on the computer using a spreadsheet program.

If you are not comfortable using a spreadsheet program (you do have to enter a few very basic formulas) then I suggest using the budgeting feature of specialized software, such as Quicken, which is really just a spread sheet with all the formulas already entered into it.

You should learn to use one of these programs anyway because they are a real aid in helping you track expenses. I entered my own on Quicken, but I used a spreadsheet program when I helped a friend set up her budget.

The first four lines of my spreadsheet look a little like this:

PROPOSED BUDGET FOR 1997

category name.. / Jan / Feb / . . .(to) . . . / Dec / …..Total $

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INFLOWS / INCOME:

The following lines include the name of each income category, then the amount of expected income from that category for each month of the year.

If you receive 26 paychecks each year, then two of the months will have a third paycheck reflected in the amount you enter.

For income from seasonal work enter amounts only in the months in which you will be earning it.

Under the column headed "Total" enter a function to SUM the amounts to the left. (hint: =sum(b5:m5) or use AUTO SUM in the tool bar).

After entering all the income categories skip a line and put "TOTAL INFLOWS" in column A and the SUM function in columns B through N.

Skip another line and start with your OUTFLOWS, / EXPENDITURE entering category descriptions for each of your expenses and the amounts for each month.

The amounts for some of the categories will be the same every month (use AUTO FILL or COPY to speed things up) but variable and less frequent periodic expenses will be entered differently for each month. Put zero in the months where expenses don't occur.

Skip a line and enter "TOTAL OUTFLOWS" and the SUM function, just as you did for inflows.

Skip another line. Then enter "INFLOWS" in column A and a reference to the corresponding cell in the "TOTAL INFLOWS" line above, followed immediately by a similar line for "OUTFLOWS" and referencing the cells just 3 lines above it.

The last line of your spread sheet will have "difference" in column A and a formula for the difference between the two cells right above it in all the other cells to the right.

If you do all of this correctly the cell at the bottom right of the spread sheet will have a formula that produces the value 0 (zero) showing that everything is in balance for the year.

Manipulate the amount in your "Savings" category in the months where the difference is positive until 0 shows in the bottom right corner.

The INFLOW and OUTFLOW totals and difference will vary from month to month, with deficits in some being canceled out by surpluses in others.

Now you should be able to see at a glance how much surplus income you need to put aside in the "fat" months to cover your expenses in the "lean" months.

All expenses are accounted for in the months where they occur, bookkeeping will be simplified because you won't have to track little bitty amounts over the months where the payments are not made, adding it all up and transferring it to a separate ledger or savings account, then transferring it back in the month when it is needed.

I have tried it both ways, and believe me, this is easier.

Happy budgeting.

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Karen is a former computer systems analyst programmer, the wife of a minister and an at-home-mother of two teenage daughters. Home management, and especially budgeting are her forte, but she also enjoys sewing, crafts, Girls Scouts, garden club, and volunteering at church and school. If you have specific questions about her budgeting method you can email her at jjones@xtalwind.net.

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