Funny about Money

How to make a budget

Funny’s first principle of sane money management is that, no matter how much or how little income or cash you have, you need a budget to help you stay on top of it.

What is a budget and what can it do for you?

A budget is just a plan for how you will organize and spend your funds, short-term ad long-term. While putting a budget together may take you a few hours, the payoffs are huge: a firm grasp on your spending, a way to get out from under debt, high credit ratings, and a reliable tool for building wealth.

While you can use a yellow pad or the back of an envelope to figure out your budget, a computer spreadsheet is convenient. Money management programs such as Quicken and MS Money have budget-building features. Personally, I use Excel for budgeting because of its flexibility, and Quicken for bank accounts and tracking cash flow. In any event, the plan is to think through your income and outgo and figure out how to control them so you never go in the hole.

Getting started

At the outset, establish how much income you have per month. Write down the total amount you net each month, from all sources of income. Even though many of us are paid biweekly, most bills are paid monthly, and so you need to know how much will be available each month to cover recurring expenses.

I generally earn a small amount of freelance income in addition to my regular salary. To avoid having to make quarterly payments, I have extra federal taxes withheld from my salary. But be sure I have enough to pay the April tax bill, I also set aside 30 percent from every freelance fee (a round number being easier for me to deal with one that ends in 8) in an account to pay taxes. Whatever part of this I don’t have to fork over to Uncle Sam is like a tax refund—but one that’s been in my money market account earning interest for me, instead of being lost for a year. So, for example, my net income for budgeting purposes on a $1,000 payment is $700.

If you have income on which you pay quarterly taxes, such as spousal support, a similar strategy works to ensure that you will have enough to cover the tax bills. Each time you get a payment, immediately transfer an amount equivalent to your tax bracket into savings. For example, if you’re in the 28 percent bracket and you get $1,000 a month in alimony, put $280 into savings before you do anything else with the money. Your net income from alimony, then, is $720, and that is the figure you will count as income in your budget.

Now start listing the things you spend money on. These fall into five categories. And note that “savings” should be one of the categories--consider it one of the areas where your monthly income will go.

Some bills, such as car insurance, car registration, and taxes, recur semiannually or annually. An easy way to cope with these is to divide by six (for semiannual) or twelve (for annual), set aside that amount each month in a savings account, and regard that amount as the same as a monthly bill. So, for example, say your car insurance is $1,200 a year, payable twice a year. That’s a $600 bill coming due every six months. Divide $600 by 6 to get the monthly cost: $100. You need to set aside $100 a month so you will have enough to pay for your car insurance.

So, here’s where the typical outflow flows out:

Bills you’ve gotta pay, no ifs, ands or buts

Mortgage or rent

Student loan payments

Credit card bills (at least minimum payments)

Car loan

Life insurance

Health insurance, if not paid through employer

Automobile insurance (usually annual or semiannual)

Taxes on property or any pre-tax income you receive

Utilities

Automobile registration (usually annual or biannual)

List these and subtract them from your monthly net income. This gives you the amount you have left to spend on less pressing matters. Here’s how my monthly non-negotiable bills add up:

Saturday, January 12, 2008

Monthly income:

Mortgage

Long-term care insurance

Life insurance

Yard care

Electricity

Gas

Water & trash

Phones (land & cell)

Property tax, homeowner’s & car ins.

Remainder:

$3,000

-170

-76

-30

-75

-225

-30

-125

-87

-300

$1,882

Savings

Pay yourself first! Don’t wait until the end of the month, thinking you’ll squirrel away whatever is left. I used to set aside $200 a month, which went into an emergency savings account to cover extraordinary expenses and to buy things I can’t afford out of cash flow, such as clothing. Now that my pay has switched from a bimonthly to a biweekly schedule and property taxes have gone into orbit, I no longer can afford that. Instead, I set aside $87 per paycheck, or about $175 a month. Subtracting this from what remains of my month’s income:

$1,882

-175 Amount budgeted for savings

$1,707 Amount left to spend

Necessary expenses over which you have some control

Groceries

Household goods

Yard care items

Pets

Home office, computer

Glasses and contact lenses

Kid costs (clothing, toys, etc.)

Gasoline

Medical copays

These are costs you can control by developing some frugal habits. You can save on groceries, for example, by using coupons, shopping sales, buying store brands, and cooking from scratch instead of using expensive prepared foods. And you might save gas by seeking out the least expensive local vendors and by planning your trips to minimize mileage. You can look for bargains on pet food and groom your dog yourself. In a typical month, mine look like this:

Groceries

Gasoline

Household items

Yard & pool

Dog

Home office

Lunches out

Extra office expenses

Medical copays

Total

$450

100

$870

$1,707 Left after fixed expenses & savings

-870 Necessary but controllable costs

$837 Amount left to spend

Bolts from the blue

These are the nasty little surprises you can’t predict but you can bet will happen when you can least afford it:

Car repairs

Plumbing bills

Veterinary bills

Medical costs not covered by insurance

Dental work

Eye care

Theft

Computer repairs

Computer replacement

Appliance repairs

Appliance replacement

And heaven only knows what else!

It’s impossible to know how much this stuff will cost. I estimate $80 to $200 a month, and I try to keep $1,000 in a savings account (stocked by the $87/paycheck deposits) available for emergency expenses.

$837

-200 Amount budgeted for annoying surprises

$637 Amount left to spend

Pay off loans

If you have any revolving debt or student loans, this category should come directly after Savings. Work on paying off debt before you spend on anything that is not absolutely de rigueur. Pay what you can afford toward principal, starting with the debt that has the highest interest rate.

In my case, I have $23,000 remaining on a second mortgage (the house is otherwise paid off). In addition to the $170 regular payment, I save $250 a month to pay the principal. This leaves us with

$637

-250 Amount budgeted for principal payment

$387 Amount left to spend

The amount you now have left is what you can spend on every indulgence that strikes your fancy.

Indulgences

Clothing

Eating out

Cigarettes

Booze

Cable TV

Cell phone

High-speed Internet connection

Hobbies

Books

Subscriptions

Decorator items

Hair stylist

Manicurist

Massage

Housekeeper

Babysitter (for evenings out)

Movies

Sporting events

Vacations

Toys, kids’

Toys, grownups’

Gifts

Movie and game rentals

As you might imagine, $387 doesn’t go far. And all it takes is one large or two small unexpected expenses to make this part of the budget disappear.

Here’s where we have to get serious about prioritizing. You can’t live like a monk all your life. You need to decide on a few things that give you pleasure and put those at the top of the list. In my case, I have to buy clothes occasionally, and my tony short haircut has to be done once every six weeks. I consider books, newspapers, and magazines to be on the order of necessities, but I don’t watch much television. And some things, I just flat can’t afford. So: I do not have cable TV, I never eat out, I travel only if my employer pays for it. I rarely go to movies, and I do not go to sporting events. I do not hire cleaning help. I go to an occasional concert if the price is right. Otherwise, I seek out activities that are fun and free: walking with a friend, hiking, bird-watching, attending free community events, singing in a choir, blogging. Let’s see what we can squeeze out of $387:

Clothing

Newspaper

Magazine subs

Books

Hair

Movies, other entertainment

Gifts

Hobbies

Concerts

Misc. other

Remainder

$387