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Think of budgeting as a personal financial plan for today and tomorrow.
Creating a personal or family budget is not at the top of most individual's "to do list".
For a household to be sustainable in the long term, money out cannot exceed money in.
It's that simple.
Creating a personal budget that covers all budget categories is a stress reliever once the budget is in and being followed.
Budgeting can be done in a very detailed manner (tracking every penny) or using a broader approach - for example, I am going to withdraw $100 per week and when it's gone, it's gone.
We recommend the following approach to creating a household budget...
Start with your recurring monthly expenses.
Mortgage, Insurance, Utilities, Car payment etc.
Calculate expenses that occur annually or less frequently than monthly.
Real Estate taxes (if not escrowed with your mortgage payment).
License Plates for your car
Life Insurance annual premium
Car repairs and maintenance.
Divide the total estimated annual expenditure by 12 and use the monthly amount
to set aside funds exclusively for these budget items.
Calculate weekly expenses and come up with a weekly allowance.
Multiply by 4.33 (There are 4 1/3 weeks in a month)
Now total up your estimated monthly budget amount.
Compare this to your net paycheck amount for a typical month and begin figuring out
how to bring the two totals closer together.
We can help you adjust your withholding at work and/or your retirement plan contribution, in order to bring your net paycheck amount in line with your budget target.
Good Luck. And ask for help if you need it. And use our worksheets (available in excel and pdf format).
Common budget busters and potential solutions include...
Buying a new car or truck that you cannot afford. Do your budget BEFORE buying and buy used if you can't easily handle the big payments. (New cars and trucks come with higher insurance and licensing costs)
Unexpected medical bills. Carry health insurance and start building a health savings account or regular savings account for the deductible and other out of pocket costs. Unhealthy people have higher and more frequent medical costs than healthy people so consider developing a healthy lifestyle to reduce future medical costs.
Using credit cards to meet the shortfall. This causes the snowball effect as interest costs add to your monthly burden and now you have to make minimum payments just to keep afloat. Among the first signs of a household in trouble is the need to carry credit card balances over and pay interest to the bank. Have a plan to pay off larger
purchases over no more than a 6 month period to reduce interest costs.
Changing your withholding (W4) to exempt to increase your paycheck. This creates a nasty surprise at tax time when you will owe the IRS and state and have to make payments on the balance due with interest and penalty.
Discounting the impact of small personal finance decisions. Habitual carelessness with your hard earned money adds up. For example, paying an ATM fee of $2 when this can easily be avoided with a little planning. Spending $6 on lunch when you have outstanding credit card debt. (Bring a peanut butter and jelly sandwich and an apple to work for lunch-cost about $1- and ironically much healthier than a hamburger and fries).
Capitalone360 Bank offers no fee online banking with higher interest rates paid on your savings and a neat Savings Goal tracker tool.
Expenses that do not occur on a monthly basis can create problems when they come due and there is no money set aside to pay them. Setting money aside on a monthly basis to cover these expenses will give you the peace of mind of knowing that the funds will be there when the time comes to pay. Use our "Savings Goal Tracker" to keep track of these funds. We recommend that you transfer these funds from your checking account to a separate savings account on a monthly basis.
LINK to Savings Goal Tracker
Dave Ramsey refers to these as "sinking funds" - same thing.
Todd's Tax Service LLC