Broker Check

100 Bank Street
New York, NY 10014
smt@wt.net

LinkedIn 

Sallie Mullins Thompson, CPA PLLC

Navigating Your Financial Life Through Effective Tax Strategies

 
Budgeting Basics: Part I

Budgeting Basics: Part I

| July 18, 2017

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.

Check the background of your financial professional on FINRA's BrokerCheck.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. Some of this material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named representative, broker - dealer, state - or SEC - registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.

Avantax affiliated financial professionals may only conduct business with residents of the states for which they are properly registered. Please note that not all of the investments and services mentioned are available in every state.

Securities offered through Avantax Investment ServicesSM, Member FINRA, SIPC, Investment advisory services offered through Avantax Advisory ServicesSM, Insurance services offered through an Avantax affiliated insurance agency.

The Avantax family of companies exclusively provide investment products and services through its representatives. Although Avantax Wealth ManagementSM does not provide tax or legal advice, or supervise tax, accounting or legal services, Avantax representatives may offer these services through their independent outside business.

This information is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.

Content, links, and some material within this website may have been created by a third-party for use by an Avantax affiliated representative. This content is for educational and informational purposes only and does not represent the views and opinions of Avantax Wealth ManagementSM or its subsidiaries. Avantax Wealth ManagementSM is not responsible for and does not control, adopt, or endorse any content contained on any third-party website.