In Part 1 of this series, I wrote about paying down debt; in Part 2, I wrote about savings. In Part 1, I said, "For now, gather all the bills and work on creating a new budget using the Comprehensive Budget Worksheet I created." Today, I am going to back up to the first step - create a budget.
Stay with what I am saying, even if it means reading it several times over, because I know it can be confusing. It can be confusing if the accountant is sitting with you, so it can be even more confusing through reading it. If necessary, take out Monopoly money and follow along using that money in place of real money to work it out mentally.
Income is any money that comes in, whether it is from a paycheck, a web business, tips, or a yard/tag sale. It might fluctuate from paycheck-to-paycheck, so use old pay stubs and calculate the average. Some months might bring in more income, like tourist season or a holiday season, so consider not using the higher pay stubs - that extra can go towards building up savings.
|Comprehensive Budget Worksheet|
Many expenses, like rent/mortgage, rarely fluctuate, so that is one that can be written into the budget easily. Some, like taxes and school tuition, are not monthly expenses, but quarterly, semi-annually, or monthly only during the school year.
Taxes apply when a person is self-employed or receives other taxable income when they are not withheld from a check. These payments are made quarterly, but this is another expense to divide by 12 and put some aside each month to keep the expense even.
School tuition may be paid twice per year, annually, or every month during the school year only. Setting aside money monthly helps to even out budget. For example, no tuition is paid in June, July, or August. Annual tuition is $1,200 (for easy math). Saving $100 monthly is easier on the mind than $1,200 all at once. The tuition at J's school is paid quarterly on September 1, December 1, and March 1; setting aside $100 per month, starting in March means that $600 is available to make the September 1 payment of $400, $500 is available to make the December 1 payment of $400 and $400 is available to make the March 1 payment.
Some expenses fluctuate, like fuel, electricity, and water/sewer. In general, add up the total for one year, then divide by 12 for an average monthly cost for budgeting purposes. The object is to keep each month's expense's even by setting aside any extra over a bill's cost one month to cover the overage another month. For example: The average electric bill is $70 per month. Month #1, the bill is $65, so there is $5 left over. That $5 should be set aside so that when the Month #2 bill is $75, the extra $5 is available.
Some months, there will be extra for several months in a row. Let that amount build up for when there is a shortfall for several months. My electric bill is higher in the winter, especially January, because the lights are on more and, in my house, the Christmas lights are on in December. Some people have higher summer electric bills because they have air conditioning and/or a swimming pool pump, so these will be the bills that money is set aside for.
My advice: IF self-control is a problem, this method could cause upsets. What do I mean? If the Month #1 electric bill is $5 less than the $70 budget, and that money is put into a wallet, it is highly likely it will be spent. When the Month #2 bill comes, that $5 no longer exists, so there is a shortfall. In this case use the highest electric bill for the budget instead of the average.
My advice: I have enough self-control to put the extra $5 aside at the end of my checkbook to create a kind-of "slush fund." When the bank statement comes, I make sure to add the slush fund money into the checkbook balance (on paper) for reconciling purposes. When the Month #2 bill comes in, I add that $5 back in at the front of the checkbook and deduct it from the back end. I know it might sound crazy, but it works.
My advice: Another method is to write a check to yourself for any overages, then void it when the next month's bills come due. Make sure to add the voided check amount back into the balance. Keep doing this each month.
My advice: A third method is the "envelope" system. Have an envelope for any category that is an averaged one. When the Month #1 electric bill is paid, take the $5 and place it into the "Electricity" envelope. When the Month #2 electric bill comes due, take the $5 out of the envelope and add it back into the checking account.
I hope no computers were thrown across the room - of course I am kidding. Once again, I am happy to answer any questions either through a comment left below or by sending me an email. If enough people want help with reconciling bank statements, I will write another blog post.
The advice here is free because it is not one-on-one. I am available to create budgets for an individual/family for a fee. While I love helping people learn how to budget, it is still work. For me, while it is work, it is something I...