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Personal Finance

Be a budgeting expert: how to track expenses with a detailed budget

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While budgeting is often an angsty one, it shouldn’t be. Budgeting is a sign of freedom, putting you in control of spending and saving decisions.

For those of you who find the Budget Envelope too simple, let’s discuss the Detailed budget method instead. This method takes a little more work, but is ideal for those who want to dig deeper into their finances than the envelope budget allows.

Basically, this budgeting method is a spreadsheet that you can download and fill out with the numbers from your checkbook, pay stubs, and tax returns. Don’t worry – it sounds more complicated than it is and we’ll walk you through each step.

First, go to the Redefining Family Wealth Resources page and download the appropriate sample budget in the Additional Resources section. Highlighted boxes are suggestions on how much to enter first for a given category. We are using the Married template for this illustration, but you can download the unique template instead.

Let’s break this worksheet down into five parts.

Consider all sources of income for you and your spouse (including employment, distributions from investment accounts, outside support, etc.) and list each separately as a position. The annual column must be completed first.

To be on the safe side, annual bonuses should be excluded from the income section. These fluctuating payments will really be a bonus, as you can pay off your debts or increase your savings. Just make sure to withhold taxes on this bonus just like you do for any other salary.

These include everything from your rent or mortgage to utilities, child care, loan payments and auto insurance premiums. You may not have a dollar amount for each item in this section, but this is a good place to start.

Generally speaking, it helps to pay big annual expenses on a monthly basis so you don’t have to think about a big year-end bill while on vacation. If your mortgage provider offers to escrow property tax and home insurance bills, do so. Insurance agencies and private schools typically offer nominal fee payment plans to spread payments over 12 months rather than a single annual payment.

One rule of thumb to keep in mind here is that fixed and mandatory spending should not exceed 50% of gross income.

“Discretionary” does not mean unnecessary; it simply reflects the variability of the expenditure. Expenses in this category would include ATM withdrawals, clothing, restaurant meals, fitness memberships, gifts and groceries. Again, you might not have filled out all of the categories, but this is meant to give you a point of reference.

This third section leaves plenty of leeway for your family to prioritize your financial goals. For example, feel free to increase the charitable donations in the Fixed Expenses category if you are tithing.

To determine the monthly amount of discretionary spending, think about averages. The vacations certainly won’t cost $ 300 per month for 12 months, so consider an annual vacation budget and divide by 12. Note that the medical expenses here are your personal expenses. Any employer sponsored insurance coverage is listed in the following section, part 4, under Payroll Deductions.

Another rule of thumb: try to have discretionary spending equal to or less than 30% of your gross income.

This category covers things like your tax payments, health insurance premiums, and pension contributions. Refer to previous year’s pay stubs and tax returns to customize this information. The health, dental and vision insurance premiums you indicate should be based on the choices you make through your employer.

Deferral of salary to a company sponsored plan such as a 401 (k) or 403 (b) plan is strongly recommended. You can even qualify for a match with the employer. More pre-tax savings lead to a lower tax bill, so higher income taxpayers can now benefit from maximizing their pension contributions. Roth IRA contributions – if you’re eligible – or Roth 401 (k) are useful if you’re currently in a lower tax bracket than you expect to be in the future.

Your bottom line is in section 5. This is the amount you have left after all other categories have been met. If there is a surplus, so much the better! Your next step is to decide together which non-retirement objective (s) to tackle first. Or you might consider increasing your pension contribution in Part 4, Payroll Deductions section.

If you end up with a shortfall, review the other sections for errors and see if you are above the percentage guidelines suggested in the Required or Discretionary Expense sections. Do not get discouraged; this is a starting point and can be a great conversation starter with your spouse when you jointly prioritize your goals.

The methodology is similar for singles. You try to aim for the same percentages in each category: no more than 50% fixed expenses and 30% discretionary expenses.

Additional cash flow is wonderful because you are doing a great job living within your means. A deficit, or a negative value, in Part 5 means you need to make some lifestyle adjustments. Find creative ways to earn more income or reduce your expenses.

Cash flow is one of the many concepts we discuss in Redefining Family Wealth. Subscribe to our mailing list to get our FREE Getting Started Guide and tips for building a family wealth.

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