Increase Revenue, Decrease Cost

This lecture (post) is part two of a two part series covering the basics of budgeting.

Welcome to Budgeting 101: Budgeting in Practice

We learned in the last lesson how to find the base amount for your budget: total income minus savings allocation. Now it is time to cover how to create a budget with this budget amount.

The first thing you want to do is find the right budgeting tool. Some individuals like budgeting applications like Microsoft Money and Quicken. The main advantage of such tools is the easy integration across spending accounts, like major credit cards and banks, with the core budget itself. A popular web based application, Mint, basically provides the same functionality, but builds a community around budgeting, allowing users to set goals and share money-saving tips. Other individuals prefer more traditional means to track budgets with paper templates or Microsoft Excel. I prefer to use Microsoft excel.

I chose to use Excel because I did not want to waste my budget on expensive applications like Money and Quicken. And Mint was a bit too social for me; I prefer to keep some anonymity to my finances. I chose to use a template provided my Microsoft which provided a comprehensive spending category breakdown. As you can see below, the template allows individuals to track forecasted to actual spending (if the image is hard to see, feel free to open the template itself by clicking here).

Whichever budgeting tool you use, the process in which to fill the budget out should remain fairly the same. You should first identify the known, unchangeable, expenses (rent, cable, car payment). Then revisit your base budget number (for monthly tools divide this number by twelve) and subtract these known expenses to formulate how much to spend on the variable expenses (entertainment, personal care, gifts). It is pretty much as simple as that. Feel free to change your forecasted spending projections each month, but make sure you stay within your monthly spending allotment!

Good Luck!

This lecture (post) is part one of a two part series covering the basics of budgeting.

Welcome to Budgeting 101: Budgeting Theory

Given that all readers have successfully passed Income Allocation 101, we are ready to explore the second funnel your money trickles into, expenses. The first lesson within this series will explore the theory behind budgeting and gain an understanding of a budgeting universe.

In order to understand the theory behind a budget, we should re-visit a key concept from Income Allocation 101: your savings funnel establishes the direction and monetary discipline of your expenses. Often times individuals believe that income allocation is a steady balance between savings deposits and expense payments, as presented below:

A more appropriate model has the individual determining his/her required savings allocation, and subtracting that savings allocation from total income to build a base budget:

The theory behind this approach: individuals have the opportunity (or are strongly encourage) to build savings before worrying about cable bills. By understanding this theory, we can quickly assemble our budgeting universe. Let’s say, for example, you were able to calculate that you need to save 9% of your annual income for retirement, 4% for emergency savings, and 2% for a family vacation. This means that 15% of your adjusted net income will be dedicated to savings categories, leaving the remaining 85% for expense management. If this individual brings in $70,000 a year, or $56,000 after taxes, he/she will have a yearly budget of $47,600 ($56k x 85%). In short, this individual’s budgeting universe is a little less than $4,000 a month.

The next lesson (post) will attempt to explain the various processes and methods for budget creation and maintenance.