Lesson 5: Develop Your Budget

MYM-5-03

Six Steps to Your Balanced Budget

Many people have vague budgets that they keep "in their head." However, those who take the next step to write it out are more likely to reach their financial goals. When it comes to budgets, one size never fits all. However, the planning process will work for anyone. You already have a good start through your work in the other lessons. The worksheets in this lesson bring it all together and guide you to a plan that reflects YOUR situation-your needs, wants, desires, and resources. Take time to complete each step in the process. Though the steps are numbered, you will probably arrive at your final estimates by considering them as a group. Use a pencil because you may need to adjust amounts in each step until you have what you feel is a satisfactory plan.

Step 1

Set your financial goals. Think again about your values-which should be reflected in your financial goals. No one can tell you what your lifestyle ought to be-but every lifestyle does come with a price tag. Only you can decide how to match your money with your lifestyle and goals.

Look back at the financial goals you set in Lesson 1. Now, on Worksheet 5-A, in the "planned spending" column, write the total monthly amount you need to set aside to reach the goals you set.

Step 2

Know your income. To make a plan to live within your income, you must know how much money you have to work with. You gathered this information in Lesson 2 on Worksheet 2-C. Now, enter your total income for the monthly planning period on Worksheet 5-D.

Step 3

Estimate your monthly fixed expenses. As you remember from Lesson 2, fixed expenses stay basically the same each month and are committed for a period of time. Although Worksheet 5-A lists typical fixed expenses, you may need to adjust the categories to reflect your situation. Your financial records of past spending-such as your checkbook register and credit card statements-serve as good information sources to estimate future expenses. You may need to adjust figures to reflect any changes in your situation, such as a rent increase.

Step 4

Estimate your regular flexible expenses. Flexible expenses occur each month, but the amounts change so you really have to carefully track expenses for items such as food, clothing, transportation, and entertainment. Lesson 2 Worksheet 2-E: Regular Flexible Spending will help you make realistic estimates to put on Worksheet 5-B. Again, adjust the categories as needed for your situation. Unlike fixed expenses, you generally have more control over these amounts.

Step 5

Estimate your occasional spending. Don’t let those occasional expenses creep up on you and find you without the money to pay them. Use your notes from Worksheet 2-F to complete Worksheet 5-C: Estimate Your Occasional Expenses. List the amount and month due for expenses that come periodically throughout the year. Consider expenses such as holidays, birthdays, home maintenance, and school supplies as well as insurance payments and license plates.

Worksheet 5-C is set up so you can see your total expenses both by the month and spending category. You can quickly note months with higher expenses as well as what you spend in the various categories. The block in the lower right corner is the total for both the monthly and category spending. Divide this total by 12 and record it on the "Amount to set aside for occasional expenses" line on Worksheet 5-A: Monthly Fixed Expenses.

Step 6

Compare income and spending and make adjustments to achieve balance. If your income and expenses don’t balance-which often happens the first time through-where can you make adjustments? If your income exceeds expenses, consider additional savings or investment goals. However, if your scale tips the other way-with expenses greater than income-here are your balancing options:

• Increase income. This may mean a new or second job for family member(s). More education or training may increase earning power down the road. Perhaps you can receive rent for storage or apartment space. Brainstorm other ideas.
• Reduce expenses. This option often can make the quickest and biggest difference. As you review each expense, consider whether it is a need, want, or desire. A need is something you must have to live your daily life. A want is a way to meet these needs with more style, comfort, or ease. A desire is something you wish you had but it does not fulfill any basic need. Cutting back on "desire" spending can free up money to pay for needs and wants. Sometimes, even "wants" must give way to basic needs.

  Study where your money is going. Where can you cut back? What can you do differently that will have the biggest pay off? The "66 Ways to Save Money" brochure listed in For More Information offers tips for reducing expenses in transportation, insurance, banking/credit, housing, utilities, and other miscellaneous items.

• Adjust debt payments. Consider negotiating reduced payments with your creditors. A consolidation loan might also lower monthly payments. However, in the long run, these choices will cost you more. Working with an outside agency in a structured debt management program may reduce late fees and interest charges.

  Agencies will work with you by phone, fax, mail, Internet, and even face-to-face. Look for a nonprofit consumer credit-counseling agency and ask questions about fees and procedures before signing anything. For more information about how to select a counseling service, read Ohio State University Extension bulletin In Over Your Head as listed in the For More Information section.

• Sometimes a combination of the above three options works best. Small changes in each option may work better for you than trying to make up the difference through a single option.

How you decide to balance your income with expenses is up to you. Think about where you are now and where you want to be in five or ten years. Your long-term plan should reflect those goals that are most important to you and your family.

Remember, good money management is more than a mathematical formula because it’s tied so closely with life’s ups and downs. Your money plan is likely to change if your life situation changes. The object of a good budget is to make your money help you reach your goals, not to force you to conform to rigid rules. Don’t be discouraged if your first budget plan doesn’t work out right away. You may have to revise it several times until it fits your situation. You will also need to review it periodically, to be sure it continues to help you use your income in the best way.