Many small business owners seek resources and information for both business and personal budgets. I am pleased to share guidelines and best practices for both types of budgets. Below, I discuss the development of household/family budgets; in Part II, I will discuss business budgets.
Why is it important to have a budget? Here are a few common reasons:
- To ensure that one does not run out of cash before his/her next paycheck.
- To determine the impact of making a major purchase via credit card or loan.
- To save for financial goals, such as new car/house, children’s education, FICA taxes (Social Security & Medicare), estimated income taxes, and retirement.
Guidelines for Budget Creation
- Collect complete data about income and associated taxes; include this from all sources, such as investments, annuities, and rental.
- For income and taxes: If a wage earner, use your pay stubs to obtain these figures. Self-employed individuals must use business net income and consider Social Security/Medicare taxes as well.
- After-tax income tells you the amount of the funds available to spend—the limit.
- Gather mandatory (non-discretionary) costs, such as rent, mortgage, car loan(s), child care, food and supplies, utilities, insurance, and credit cards—those bills that must be paid each month.
- Determine/estimate other (discretionary) expenses, using checkbook registers and monthly bank/credit card statements. Don’t forget purchases made in cash; save receipts for that.
- Use an excel spreadsheet to setup your budget on a monthly basis or buy an app such as Quicken, which has great planning/budgeting tools.
- Review your budget figures against actual at least quarterly, but preferably monthly, and adjust the future budget amounts as needed.
- Revise your budget when needed to accommodate major life events, such as a raise, new job, non-recurring purchases, new debt/loans, or addition to the family.
- Calculate the spending ratios below, particularly when making major buying decisions.
Budget Creation and Maintenance
If you use Excel:
- Income/taxes/expenses should be the row headings, with months the columns ones.
- Allow three columns for each month—one for budget, actual, and difference.
- Subtotals are useful to group income, taxes, and the two types of expenses (mandatory and discretionary). To begin, input the budget figures for all months.
- As the months pass, input the actuals, calculating and reviewing the variances monthly—or at least quarterly.
Even better than using Excel, use Quicken, so that you can:
- Setup your annual budget using Quicken’s Planning/Budgeting tools.
- Input income/taxes as received/paid and cash/check expenses as incurred.
- Download (or manually enter) and reconcile transactions from your checking, investments, and credit card accounts.
- Generate and review Quicken actual versus budget reports monthly.
- Browse other Quicken Planning functions and reports that might be of use.
According to a survey by American Consumer Credit Counseling, 43% of American consumers don't know what the recommended spending guidelines are for a household budget. Financial planners recommend:
- Consumer debt (non-housing, such as credit cards, car payments, & student loans / net income) should not exceed 20%.
- Housing costs (rent/mortgage + maintenance + utilities + home insurance / gross income) should not exceed 28%.
- Debt to income (consumer debt + housing costs / gross income) should not exceed 36%.
If you have questions or comments, please do not hesitate to contact me.