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| Budgeting – It’s Not as Hard as You Think |
By:
Charles W Davis |
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Budgeting got you stumped? Not quite sure where to start? Here are some clues from a business consultant.
We had better start with some myth breaking news. Budgets are not straight jackets. A budget is a tool to help you manage your money. And need I say more about that in these difficult financial times?
But whether you are very well off, or struggling budgeting is a good idea.
Where do you start? When that question was first put to me, I answered, “start with your checkbook.” Today, I might add, “and your credit card statements.” Either way you are beginning the budgeting process by understanding where you have been. You need to see what you are spending your money on now to better plan for the next week and months ahead. I have had people say, “well I don’t care about where I spent my money; I want to better control my money in the future.” But, if you do not know where you spend your money now, you will be unable to control it in the future because you will never understand what is a reasonable amount to spend in any category at any particular time. Consequently, you will most likely overspend in every category.
So get out your checkbook and credit card statements and begin to itemize the expenditures you find there. The usual categories are food, utilities, rent/mortgage, health insurance, auto gas/oil/maintenance, auto insurance, disability insurance, telephone/Internet/cell phone, clothing, entertainment/movie rentals/DVD purchases, movies/theatre, charity, self-employment taxes, waste/refuse removal, medical, dental, school supplies, savings, and miscellaneous. This does not have to be all the categories you would desire to track, nor does it imply that you must use all of these categories. The budget is personal to you. You choose the categories that are meaningful to you.
How far back should I go? The majority of expenses happen every ninety days, so go back and categorize and add up all the expenses per category for three months. Beware of those expenses that happen either semi-annually or just annually. Many people pay for their auto insurance semi-annually, and real and personal property taxes are commonly paid annually.
By now you should have identified your categories and have added up the expenses for each for the last three months. Typically, to estimate an upcoming month, you would divide the total for each category by three - but inflation can make a difference. Since prices have risen more quickly lately than over the last several years, give more weight to the most current month in setting a budget figure for that category.
Now test the budget by adding up the calculated totals over all the categories and see if that is reasonably close to your income. If it is considerably more, you possibly have a serious problem – you are spending more than you make. Clearly you will have some tough decisions to make. If it is about the same, you budget is probably just about on the money. If it is considerably below what you make and you do not have any savings to account for the difference, your budget is probably incorrect. If it is incorrect, look for expenditures typically made with cash and see if that makes up the difference.
When you are satisfied that the projected numbers are accurate, the budget really comes into play. The importance of money is that it gives you a choice. If you have no money, you have little or no choice. The budget helps you manage your money by highlighting the choices you have.
While some people may actually use envelopes with money in them, I use a computer spreadsheet. On the spreadsheet I start with the money in the bank (my checkbook balance, not the bank’s balance) and add monies I expect to deposit and subtract expenditures I expect to make each day. The forward days are estimated but the figures are still what I expect to have as a beginning balance, what I expect to deposit, and what I expect to expend. At the bottom of the spreadsheet column is the ending cash balance for the day. This ending balance becomes the opening balance for the following day. I keep it up day-by-day for a month at a time. The actual expenditures replace the amounts that were earlier estimated. The real benefit of a budget is in detecting a problem well before it happens.
Because of advance planning, I can see if my balance is going to be less than I desire. If so, I can maneuver expenses around, delay some if necessary, and hold payments if necessary so as to always have what I want as a minimum ending balance. I am planning my expenditures to match my income.
Now the real fun of budgeting is to drive the ending cash balance higher and higher by managing your cash better and better. You start by analyzing what it is you spend your money on. I gave you a category list earlier that you may have altered for your situation.
As you look through the list with the accompanying amounts, you should be asking yourself, “is this really necessary, or could I spend less here, or how might I spend less here.” Constantly challenging the list keeps you focused on the job of properly managing your money.
In the turnaround management business, turnaround managers frequently rely on the 80/20 rule. For our purposes, the 80/20 rule means that roughly 80% of your expenditures will come from just 20% of your expense categories. To start your analysis, concentrate on the 20% of your categories that are costing you the most. Once you have exhausted that list then go on to the next 20% and so on. Okay, so you list all the categories with the highest costs on top to the lowest and you challenge, pick-apart, and scrutinize every category.
Money is about choices. Budgeting merely helps you understand what choices you have. Do not be afraid of it. Many people bury their heads in the sand and hope for the best. This is ineffective for any kind of management, and certainly for cash management. Now here’s a bonus. If you can do this for your personal or family budget, you can apply and do it for a company budget. It really works the same way. |
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