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Sallie Mullins Thompson, CPA PLLC

Navigating Your Financial Life Through Effective Tax Strategies


Budgeting Basics: Part I

| July 18, 2017
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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

  1. Collect complete data about income and associated taxes; include this from all sources, such as investments, annuities, and rental.
  2. 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.   
  3. After-tax income tells you the amount of the funds available to spend—the limit.   
  4. 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.    
  5. 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.
  6. 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.
  7. Review your budget figures against actual at least quarterly, but preferably monthly, and adjust the future budget amounts as needed.
  8. 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.
  9. 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.

Spending Ratios

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.

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