Budgeting Works - by Lee Ann Fox
Updated: Jan 14, 2019
This article was originally published in The Union Democrat.
As you gather and review your paperwork at tax time, remember now is the time to set up a budget for the next 12 months. You have most of what you need in front of you and that is half of the battle.
A budget or spending plan is a way to make sure your actual spending is in line with your business and family goals. And while budgeting is usually likened to a “diet”, I view it as a “lifestyle”. And, as a sole proprietor, I find it easiest to combine my business and family spending plan.
When I started following a spending plan, my financial life was transformed. I am now able to see into the future by forecasting; I have a healthy emergency fund; it helped me to pay off my consumer debt; it helps me to create special funds for future purchases. The best result from having a spending plan is I now have less stress. Now my money works for me.
The first thing you need to do to set up a spending plan is to figure out your past income and expenses (always full of surprises). This is how doing it at tax time makes it easier. You have your 1099s and/or W-2s in front of you already. If you itemize or have a small business – you have a lot of your expense info in front of you as well. What you probably don’t have are a lot of your personal expenses (especially cash purchases). Those might take more digging or estimating.
Start with what you know on one column of a spreadsheet (Excel or free Google Docs). Set up more columns for your “actual” numbers. Tracking your actuals is the most important part of budgeting, but it takes discipline. It is easiest for me to track actuals by week because I get paid weekly. I have a column for each week and I spend a few minutes on Mondays to update how I did last week and to plan for the upcoming week.
If you regularly spend cash, you might want to include an envelope system to track those expenses. Create envelopes for each expense category and either put receipts in the envelope or put cash in the envelope and spend out of the envelope. If you are out of lunch money by Wednesday, then you either need to increase your lunch fund or start making your lunch.
Don’t forget to plan for those expenses that might only happen a few times a year; property tax, Christmas, birthdays, so on. I set up a fund for those and fund them every week. It is easier for me to save $10 a week than come up with $500 at Christmas time. To do this, I have a couple of different savings accounts to help me move and track the money. Also, don’t forget to plan some wiggle room (I always guess my income low and my expenses high.)
I also review my budget monthly. I track three months forward and three months back. I work to reduce my spending plan by one item per month. I look for things that can be eliminated, reduced, and/or renegotiated (is there a cheaper cell phone plan available?)
When you are working on your plan, it might be helpful to know recommended spending amounts are 50% on needs (groceries, rent/mortgage, transportation, insurance), 20% on savings (building an emergency fund of three to six months, retirement match – if available, debt repayment, unmatched retirement) and, 30% on wants (out to eat, toys/activities, vacations).
I often hear “I don’t need a budget because I don’t have any money”. Those are the folks that need a budget the most. You are spending money, right? Then be proactive in how you are spending your limited funds. If you are using credit cards to supplement your spending every month - you still need a plan. Budgeting and tracking your actual spending is one of the sure-fire ways to take control your financial future.