Budgeting for Expenses

April 13, 2006

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Anyone who goes about setting up a personal financial budget usually is well aware of the importance of accounting for personal expenses. (In fact, some individuals — with varying degrees of success — create a budget without formal entries for income.)

However, recognizing the need to scrupulously account for all expenditures during the reporting period that you choose (monthly, for most people), and actually doing it for long enough to do much good, can be two different matters. Unless you are the type of person who really enjoys record keeping and working with figures, the process of budgeting for expenses can be difficult and tedious. Although it may be hard to see when you start, the time you spend preparing and maintaining your personal budget can yield real financial gains.

The process of budgeting for expenditures may be broken down into several steps:

Forecast your expenditures. The best way to do this is to look at your checkbook register and credit card statements for the last six months or so, and see how much you spent each month in various categories of expenses such as savings, housing, utilities, phone, car payments, gas & transportation, insurance, clothing, gifts, entertainment, and whatever other categories make sense for your life. Don't forget to account for out-of-pocket, cash expenses that will arise during the month (or other budget period you choose). If you don't know precisely how much you spend this way, you can start by penciling in an estimated figure. Then, keep track of your cash expenditures for a month, perhaps by writing them down in a small notebook. Once you get to the point that you know the actual amount spent, you can replace the estimated amounts with the "real" figures. You may be surprised at how much money dribbles through your fingers this way.
Track your expenses each month, and compare your actual expenses for each category with what you budgeted for that category. Even if money budgeted for one purpose is not spent on that, there's a real temptation to spend it for another purpose.
Make adjustments. For categories where the budgeted amounts don't match your actual expenditures, you'll need to make adjustments.

Making budget adjustments. When it turns out that you have paid more (or less) for an item than the amount you had budgeted, you will, of course, want to adjust the amount of the estimated budget expense to agree with the amount you actually paid. But, this may not be all that is required — other budgeted items (in either the current, or later budgets) may have to be changed.

Item is more than budgeted amount: If you are dealing with a cost overrun (or unbudgeted item), you may want to consider one or more of the following:

Decrease amounts budgeted for other items, either in the current or future budgets.
Increase income, either in the current or future budgets.
Do nothing, and let the change to the "bottom line" for the current budget (the amount of decreased cash or increased deficit) be carried over to the next budget.

Unlike governmental units, business owners and their families normally can't run budget deficits for any great length of time. If your personal budget shows you to be running a deficit, you'll usually need to quickly bring in more assets (by increasing income, tapping savings, or obtaining loans) or, more likely, to decrease spending on other budget items. Because a small business owner's ability to get a business loan is often dependent on his or her personal creditworthiness, it's vitally important for your business operations that you keep your personal financial house in order.

Item is less than budgeted amount: If you are dealing with the situation where a budgeted item was either acquired for less than the budgeted amount, or the expenditure was not made at all, you may want to:

Increase amounts budgeted for other items, either in the current or future budgets.
Do nothing, and let the change to the "bottom line" for the current budget (the amount of increased cash or decreased deficit) be carried over to the next budget.

If it turns out that you're spending less than your income, congratulations! You're among a very select group of Americans. We usually recommend that you try to save at least half of the excess cash, for other times when you might have more expenses than you forecasted.