User:Kenneth Cochran/sandbox

A Personal Budget is a plan for managing income and expenses in personal finance.

Rationale

A comprehensive personal budget provides a clear understanding of an individual's expenses, encouraging informed financial decisions. The ultimate goal for any budget is for income to meet or exceed expenses. This is achieved by anticipating and accommodating future expenses based on past ones and by sacrificing discretionary spending in favor of obligatory spending or a savings goal.

Methods And Systems

Basics

Planning for fixed income and expenses is usually straightforward because the ammounts remain constant. Common forms of fixed income include salaries, pensions and social security. The most common fixed expense is debt payments. This includes mortgage, loan and credit card payments. If fixed expenses from debt exceed income measures must be taken to either increase income or decrease debt. A negative budget is unsustainable.

Write down a list of all loans, monthly expenses and any other regular cash flows. Also look at your assets such as the equity in your home as well as savings and retirement funds.

Examine your goals both long term and short term. Will you need to pay for school, retirement, a house, new car, vacations, replacement dishwasher, holiday spending, etc.

60/40 Rule

MSN's A simpler way to save: the 60% solution suggests that you aim to spend 60% of your gross income on fixed expenses including taxes and regular bills.

The other 40% breakdown as follows with 10% each:

irregular expenses: Vacations, major repair bills, new appliances, etc.
Long-term saving/debt: Money set aside for car purchases, major home fix-ups, or to pay down substantial debt loads.
Retirement: Ideally, 10% of your gross income.
Fun money: Everybody needs a little fun money.

If you have credit card debt, or perhaps car payments the 20% allocated for retirement and long-term savings needs to go towards those. No sense in paying more in interest on a loan than you make off of savings and retirement accounts.

These numbers are not absolute, but rather a good target to aim for depending on your goals. Remember that once debt is gone, 10% is going to irregular expenses to keep you out of debt and will be spent eventualy.

Rent is 25% Rule

It has always been the general advice from all good counselors I have met: make sure your monthly rent does not exceed 25% of your monthly income. Using Just Budget, my favorite web based personal budget software, I've been looking at all my expenses with my incomes and made my Rent fee go down to 10%. Everything gets much easier at that point for sure. And 10% has been a quite good situation for me. But I know how to reproduce it now. Look at 17-22% as a goal. 25% as a TOP Maximum.

Month Ahead

This is the hardest to start, but is very easy once you've got it going. There are sites that try to sell this method, but never tell you how to get there if you are already in debt and living paycheck to paycheck. There are many benefits to doing this, but those who need to budget the most are those living paycheck to paycheck.

Very simply, all of your income is to go into a savings account each month. At the end of the month, you create your budget for the following month based on that income. This prevents you from spending money you have not earned yet. You already know your income for the period, and just need to plan for the months expenses. You can then transfer the budgeted amount into checking to spend as your budget dictates. This way you only spend your previous months earnings.

Also remember, once you are living a month ahead. It will get much easier to live 2, 3 or 6 months ahead. Which, seriously, isn't that tough.

Envelopes

The idea of envelope budgeting is to actually or virtually put money aside into labeled envelopes for future expenses. This makes it easy to see how much you have available. This is easy for someone paid in cash such as a waitress. Just label a few envelopes with names such as rent, food car payments, gas, car insurance, etc. On each envelope you can also put the amount due each month and the due date. A quick glance inside each envelope lets you know how well your budget is doing.

This method can be difficult if you are mostly cashless, however there are also digital ways of doing this type of budgeting, Ramysoft's Envelope Budget for Windows, the web-based Mvelopes Personal, the Excel-based You Need A Budget, and Snowmint Creative Solutions' Budget for Mac and Windows.

The main idea is to save for expenses and never spend what you don't have. You can only spend what you have . This is a more fine grained version of Month Ahead budgeting and can complement it.

Credit Cards and Loans

There are two basic ways to keep track of credit cards using the envelopes method.

Loans and credit cards you no longer use

Just treat it like any other bill by allocating the amount due each month.

Credit cards that you use

Don't allocate any income but rather transfer money from other envelopes when you pay with it. For example, if you pay at the pump, put that amount of money from the fuel envelope into the credit card envelope. This way, you will have enough to pay what you charged when the bill comes due and you know how much you have left to spend on gasoline. You will also need to have an envelope for finance charges.

48 Week Method

The idea here is to plan on 48 weeks of income. The extra four weeks are from the months that have five Fridays. Plan income around four weeks of work each month rather than deviding your yearly pay by twelve. Those extra weeks can be split among the 40% on the 40/60 plan anyway you'd like, with debt paydown being the most helpful.

If you aren't a month ahead and instead allocate a portion of each paycheck to bills, be sure to mark the extra Fridays so that those get special allocation.

Tools

Software

Many people use their PCs with various software packages.

Quicken/Microsoft Money/etc

Quicken and Microsoft Money are two popular applications for the PC. Quicken is also available for Mac, and similar programs exist for Linux. Expense Trend is a similar program available on the web.

These applications are generally easy to use and provide many helpful features. Access to a computer is a must, and internet account access is helpful. A persons financial history can be projected and sliced and diced in various ways.

Pros: Reports, graphs, projections, history and calculators. cash-flow analysis.
Cons

Must be kept-up to be useful: yes but it is the idea. Whatever the method (software/spreadsheet/paper) you are using you got to keep your tracked expenses up to date. Doing it on a day per day basis makes it much easier. Usually does not take me more than 10 mins a day.
entering transactions can be tedious without internet account downloads: yes but if you keep your receipts and enter all your expenses everyday. It becomes much easier and faster. Also, your software should help making the data entry easier.

Envelopes-type Software

Ramysoft's Envelope Budget for Windows, the web-based Mvelopes Personal, You Need A Budget, and Snowmint Creative Solutions' Budget for Mac and Windows.

See envelope budgeting.

Spreadsheet

You can also keep track of income and expenses with a spreadsheet, recording expenses and income as they come in and forcasting for at least a month things such as paychecks and your six or three month car insurance payments. A good desciption that details this and gives an example file to download is at Sally's Kitchen & Stuff

Some websites and individuals offer spreadhseets that explain how to budget as the user goes through them. Some are free; others aren't. PearBudget is an impressive example of a free Microsoft Excel spreadsheet. Note that it should also work in OpenOffice and KSpread. Just Budget is another free budgeting program. An example of a spreadsheet solution that is not free (but maybe will save some time in developing your own) is at You Need A Budget.

Pen and Paper

The simplest method of all, but possbily the most work if you let it, and maybe the least.

Either print a self-made form or write it out each month in a notebook, three-ring binder, or a stack of index cards.

Sticking to it

K.I.S.S (Keep It Simple Stupid)

The more complicated the budgeting process is, the less likely you are to keep up with it. Don't keep your check register updated? Then try to keep it as simple as possible. Want lots of detail? Use software that downloads data from your bank and categorizes it for you. Putting every penny into categories with pen and paper is more work than most can commit to.

Fun money

It's relatively easy to commit to only spending the 10% fun money and never touching the rest. Once it's gone, its gone. Things like eating out, movies, and your favorite author are things to spend that 10% on. That way you will have enough for gasoline to last the rest of the week. This money can either be cash in wallet, or an extra checking account with a check card. Only spend what you have, none of it is committed to anything else.

Work vs. Detail

It is generally better to reduce the amount of work spent on keeping track of the budget. More detail does not always mean more work if you take advantage of finance software that inputs transactions for you. On the same token, every single purchase does not have to be recorded. If you commit to spend a limited amount of cash it is easy to see how much you have left and you can't easily overspend and as long as you don't spend funds already committed to other things.