What To Do When

A budget has two sides - the income side and the expense side. You probably have a rough idea of your fixed expenses - like your house payment or rent, utilities, and loan payments. On the other hand most people underestimate their discretionary expenses - things like clothing, gifts, eating out, and entertainment. Your budget needs to list both fixed and discretionary expenses.

To prepare your budget you will need a list of your expenses for the last three months, along with your last couple of pay stubs. Your checkbook register will probably contain most of the information you need. If you use a credit card to pay for everyday expenses you will need copies of your last three credit card statements. If you do not have these statements you can request a copy from your credit card company. Now, if you have your checkbook register and your credit card statements, you probably have all your expenses except for purchases made with cash. You probably got your cash one of two ways: you deposited your paycheck and kept out a certain amount of cash, or you went to an ATM and took out cash. Either way it should be easy to determine how much cash you took out by reviewing your bank statements, you will just need to estimate how you spent that cash.

Even if you don’t have 100% of what you need, you should go ahead and prepare your budget and simply estimate any missing information. As any good accountant will tell you, an educated estimate is much better than nothing at all. You can put a small star by any estimate, and as time goes by you can replace the estimate with a more precise number.

Below is a sample budget for John and Jane Brown. The following numbers correspond to the numbers referenced on the budget.

1.                  In the income section we show their weekly gross earnings (earnings before any deductions) along with all deductions on their paycheck. Since they are paid weekly, their weekly pay was multiplied by 4.33 to determine the monthly amount. If you are paid bi-weekly you will multiply your paycheck numbers by 2.16 to come up with your monthly numbers. If you are paid twice monthly you just double the numbers on your paycheck.

2.                  At the bottom of the income section we added John and Jane’s net pay together to come up with their total net pay (take home pay). Your net pay is what you have available to pay expenses and to put into your savings account.

3.                  On the expense side we listed all of John and Jane’s expenses. For expenses that are billed monthly (like electric) we just listed the monthly amount and for expenses that are incurred weekly (like food) we listed the weekly amount and multiplied by 4.33 (the number of weeks in a month) to determine the monthly amount. The expenses are broken out by category to help you identify any problem areas.

4.                  The next column on the expense sheet lists what percent of your income should go to each category.  A recommended low and high percent is listed. This is an excellent tool that will help you spot problem areas.

5.                  The last column on the expense sheet lists what percent of their income actually went to each category. It is easy to determine the percentages. For the house expense percent we just divided the category total of $1087.00 by the total net income of $4508.74. ($1087.00 ÷ $4508.74 = .2411) To convert .2411 to a decimal simply move the decimal point over two places - .2411 becomes 24.11.

6.                  The last line of the budget shows how much money is left after we subtract the expenses from the income. If the number is negative, the expenses exceed the income.