Q: I know I should develop a household budget and make every effort to keep on track throughout the year. The beginning of the New Year seems like an ideal time to begin. Do you have any suggestions on how to start?
A: For many people, the idea of budgeting invokes unpleasant thoughts of self-denial and extra recordkeeping. However, it doesn’t have to be a chore or complicated. A budget is basically a saving and spending plan that can help you reach your financial goals. Developing a budget may be your resolution for improved household financial health.
Getting Started
Start by listing all sources of monthly income, including salary, bonuses, commissions, interest, dividends, and rental income. Next, identify your major expense categories.
Major Expenses
Consider fixed monthly expenses such as mortgage or rent, insurance premiums, child care, and utilities, as well as those expenses that vary month-to-month like food, clothing, medical bills, gifts and car repairs. Then, using your checkbook register and credit card statements, begin allocating your expenses to the different categories you created. You may be surprised at how much you are spending in certain areas. When you see your spending on paper, you may find yourself much more motivated to change your habits.
Count it All
You may find that your records reflect only a portion of your spending. The amount not recorded may be significant. If you can't account for a large chunk of your income, try carrying around a small notebook for a few months and record all you spend. While spending $5 a day on incidentals may seem trivial, the $1,825 you could have at the end of a year if you did not spend it certainly is not.
Keep a Budget
Once you write down your expenses, you can use them as the start to developing a monthly budget. A budget is an excellent tool for making sense of your financial life and identifying where change is needed. Add up your pay checks each month, and then deduct your regular expenses, such as house payments, utilities, groceries, giving and savings. You may determine that your spending is not in line with your family’s priorities or that there is not as much left over for discretionary spending as you would have expected. With a budget, you can better control your financial decision-making.
Your Own Financial Statement
Understanding where you stand financially can help you make decisions about your future. The process is simple: Add up the value of what you own, including the equity you have in your home or any other property and the amount in your savings, investment or retirement accounts. Then calculate your debts, including your total outstanding mortgage balance, auto loans, student loans and credit card balances. If your assets are greater than your debts, then the excess amount is your net worth. If your debts add up to more than your assets, it’s a good idea to give some thought to your debt management plan and your spending habits.
Count on Your CPA
You may contact me at (409) 892-0233 or (409) 883-5306. My email address is brad@ekc-cpa.com.
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