Tuesday, January 18, 2011

Day 96 - Step 7: Make A Budget (Part II)

January 18, 2011

I have developed a guide to help you (and me!) achieve the mindset and principles required to successfully become debt free.  This is the seventh in a series of posts about my Twelve Steps to Debt Freedom.
 Step 7: Make A Budget
Image: Michal Marcol / FreeDigitalPhotos.net
Let me start by giving you major props for continuing to slog your way through a two-parter on making a budget (haven't read Part I yet? Click here).  Anyone who has made it this far in the Twelve Steps to Debt Freedom has a high probability of obtaining debt freedom based solely on their tremendous will power and perseverance.

To help you get through both parts of this step and provide a hands on experience, I have provided a link to the 60K Project Budget Template that I use during my budget discussion.  I have also embedded the template into the blog post so you can play around with it.  I don't learn much from reading alone - I have to dig in and actually try something out before I start to get it.  Hopefully making the template available will make it easier to understand how this step works.

Part II - Non-Recurring Expenses and Take Home Pay


Non-Recurring Expenses.  These expenses should be handled exactly the same way as the recurring expenses you worked with in Part I.  The only difference is that expenses in this category should be ones that you do not expect on a regular basis.  Think about upcoming personal commitments you may have during the period - gifts, fines, haircuts, emergency vet bills.  You can also apply the same analysis you did to your recurring expenses to determine whether any of these items could be removed or reduced.  From my experience, most of the non-recurring items are unavoidable expenses in the period.  Otherwise, you would have put off including them until you absolutely needed to pay.

Actual and Variance.  No surprises here - track the actual amounts you paid for your non-recurring expenses.  The spreadsheet has a built-in formula to automatically calculate the variance between budgeted and actual.

Total.  The row labeled 'Total' should only reflect your total expense amounts - both recurring and non-recurring - for the period.  This should automatically calculate for you in the spreadsheet.

Paycheck.  Input your take-home pay for the period in this row.  Take-home pay should reflect the amount actually deposited in your bank account and excludes money taken out for tax, 401(k), insurance or anything else.  This is because you want your budget to reflect the actual amount of money available for you to use during the period.

Total Income.  This row reflects the total take-home pay during the period if you have more than one income source.  This amount should automatically be calculated for you.  Note that the amount is the same as the Paycheck row because there is only one source of income during the period.

Net.  This is a very important number.  Net reflects the amount of money (if any) that you have left over after accounting for all of your expenses for the period.  If you notice a negative amount here, get ready to start cutting expenses - you don't have enough money this period to pay everything!  In addition, the Net amount may be that extra amount you need to apply towards your debt.  Maximizing this number is in your best interest.  For us, we have to make sure our Net amount is at least $800 at the end of the second half of the month in order to cover all of the bills due during the first half of the month (all but one bill is due during the first half of the month).  All of this hard work is so you can hopefully find some way to reduce expenses or increase income - meaning increasing the Net amount!!  Meaning extra money to use to pay towards debt!!

Bank Balance Reconciliation.  This section really helps me because a lot of times my budget spreadsheet doesn't reflect what is in my bank account.  This is a quick reconciliation to figure out why.  Usually it is because a check I wrote to someone two weeks ago still hasn't cleared.  Another time I had a calculation error in my budget.  Taking the time to complete this section allows for a check to make sure the numbers seem reasonable.  You will eventually make a mistake - try to catch it quickly.  This reconciliation is one way to help.

Future Periods.  Each period I create a new tab and use the prior period's ending balance as the next period's beginning balance.  I'm basically rolling forward the remaining balance each month.  The template I provided shows January Part I, January Part II and February Part I.

What Else?  Wow, you should get an award for getting to the end of this step!  If you look half as good as the girl in the photo above who supposedly has a headache, then you are way ahead of me!  Remember that you should really find a process that works for you - don't just follow my directions.  Download the 60K Project Budget Template and change the format, content or time period reflected so it fits your fact pattern and you get something out of this exercise.  Make it pink and purple, add a graphic or motivational quote, make it your own!  You will need this template for Step 8 so don't throw it in the fireplace yet!

Let me know how you improved the budget process I described so I can share with other readers.  There is always room for improvement so let me know!

Read About Step 8: Cut Back Where You Can

But first, stay tuned for some comic relief.........I'm feeling 12 Steps overload.
Sarah
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