Action Before: Make and Reconcile Budget Estimates
Before the month begins, you make and reconcile budget estimates of income and expenditures. Here you resolve conflicting needs and wants by revising estimates as necessary. You can’t have everything in life especially this month even though you might want it
Make Budget Estimates
Before the month begins, you make and reconcile budget estimates of income and expenditures. Here you resolve conflicting needs and wants by revising estimates as necessary. You can’t have everything in life especially this month even though you might want it
Make Budget Estimates
Budget estimates are the projected dollar amounts in a budget that one plans to receive or spend during the period covered by the budget. Begin by estimating total gross income from all sources, and review take-home pay and then discretionary income. For example, Jonny Deppe’s annual gross income is $60,000 and after employer withholdings for taxes, insurance, and union dues, his take-home pay (also called disposable income) is $48,000. This is the money available for spending, saving, investing, and donating. Focus also on your discretionary income. This is the money left over once the necessities of living are covered, such as paying for housing, food, and other necessities. It is usually the money that is really “controllable” and often makes up the bulk of your variable expenses. After Jonny pays his rent, food, utilities, and car payment, his discretionary income is $18,000.
Table 3.7 presents budget estimates for a college student, a single working person, a young married couple, a married couple with two young children, and a married couple with two collegeage children. The college student’s budget requires monthly withdrawals of previously deposited savings to make ends meet. The single working person’s budget allows for an automobile loan, but not much else. The young married couple’s budget permits one automobile loan, an investment program, contributions to individual retirement accounts, and significant spending on food and entertainment. The budget of the married couple with two young children allows for only an inexpensive automobile loan payment even though one spouse has a part-time job to help with the finances. The budget of the married couple with two college-age children permits a home mortgage payment, ownership of two paid-for automobiles, savings and investment programs, and a substantial contribution for college expenses.
It is essential to make reasonable budget estimates. If you have seven Christmas gifts to buy and expect to spend $50 for each, it’s easy to make an estimate of $350. If you want to go out to dinner once each week at $50 per meal, estimate an expense of $200 per month. Avoid using unrealistically low figures by simply being fair and honest in your estimates. Then add up your totals
Revise Budget Estimates
Table 3.7 presents budget estimates for a college student, a single working person, a young married couple, a married couple with two young children, and a married couple with two collegeage children. The college student’s budget requires monthly withdrawals of previously deposited savings to make ends meet. The single working person’s budget allows for an automobile loan, but not much else. The young married couple’s budget permits one automobile loan, an investment program, contributions to individual retirement accounts, and significant spending on food and entertainment. The budget of the married couple with two young children allows for only an inexpensive automobile loan payment even though one spouse has a part-time job to help with the finances. The budget of the married couple with two college-age children permits a home mortgage payment, ownership of two paid-for automobiles, savings and investment programs, and a substantial contribution for college expenses.
It is essential to make reasonable budget estimates. If you have seven Christmas gifts to buy and expect to spend $50 for each, it’s easy to make an estimate of $350. If you want to go out to dinner once each week at $50 per meal, estimate an expense of $200 per month. Avoid using unrealistically low figures by simply being fair and honest in your estimates. Then add up your totals
Revise Budget Estimates
Sometimes the math is alarming! When initial expense estimates exceed income estimates, three choices are available: (1) earn more income, (2) cut back on expenses, or (3) try a combination of more income and fewer expenses. The process of reconciling needs and wants is a healthy exercise. It helps identify your priorities by telling you what is important in your life at the current time, and it identifies areas of sacrifice that you might make. Revising your shortterm financial goals may also be required.
You have no choice: You must reconcile conflicting wants to revise your budget until total expenses do not exceed income. Perhaps you can change some “must have” items to “maybe next year” purchases. Perhaps you can keep some quality items but reduce their quantity. For example, instead of $200 for four meals at restaurants each month, consider dining out twice each month at $60 per meal. You’ll save $40 and still have two really nice meals. Your actions on money matters override your words, so act accordingly. Table 3.8 presents the annual budget for Harry and Belinda Johnson and reflects their efforts to reconcile their budget estimates until the total planned expenses fall below the total planned income. Harry and Belinda are “paying themselves first,” in the amount of $400 per month, to save to buy their own home. The Johnsons have a little way to go to fully reconcile their annual budget estimates.
Action Before: Plan Cash Flows
Before the month begins, you plan your cash flows. Income usually remains somewhat constant month after month, but expenses do rise and fall sharply. As a result, people occasionally complain that they are “broke, out of money, and sick of budgeting.” This challenge can be anticipated by using a cash-flow calendar and eliminated with a revolving savings fund. The budget estimates for monthly income and expenses in Table 3.8 have been recast in summary form in Table 3.9, providing a cash-flow calendar for the Johnsons. This is a very useful budgeting tool. Annual estimated income and expenses are recorded in this calendar for each budgeting time period in an effort to identify surplus or deficit situations. In the Johnsons’ case, planned annual income exceeds
You have no choice: You must reconcile conflicting wants to revise your budget until total expenses do not exceed income. Perhaps you can change some “must have” items to “maybe next year” purchases. Perhaps you can keep some quality items but reduce their quantity. For example, instead of $200 for four meals at restaurants each month, consider dining out twice each month at $60 per meal. You’ll save $40 and still have two really nice meals. Your actions on money matters override your words, so act accordingly. Table 3.8 presents the annual budget for Harry and Belinda Johnson and reflects their efforts to reconcile their budget estimates until the total planned expenses fall below the total planned income. Harry and Belinda are “paying themselves first,” in the amount of $400 per month, to save to buy their own home. The Johnsons have a little way to go to fully reconcile their annual budget estimates.
Action Before: Plan Cash Flows
Before the month begins, you plan your cash flows. Income usually remains somewhat constant month after month, but expenses do rise and fall sharply. As a result, people occasionally complain that they are “broke, out of money, and sick of budgeting.” This challenge can be anticipated by using a cash-flow calendar and eliminated with a revolving savings fund. The budget estimates for monthly income and expenses in Table 3.8 have been recast in summary form in Table 3.9, providing a cash-flow calendar for the Johnsons. This is a very useful budgeting tool. Annual estimated income and expenses are recorded in this calendar for each budgeting time period in an effort to identify surplus or deficit situations. In the Johnsons’ case, planned annual income exceeds
expenses. The couple starts out the year with many expenses, resulting in deficits for the next six months. Later in the year, income usually exceeds expenses, but they are still faced with a deficit at year’s end
Effective management of cash flow can involve curtailing expenses during months with financial deficits, increasing income, using savings, or borrowing. If you borrow money and pay finance charges, the credit costs will further increase your monthly expenses. For this reason alone, it is smart to “borrow from yourself” by using a revolving savings fund. This is a variable expense classification budgeting tool into which funds are allocated in an effort to create savings that can be used to balance the budget later so as to avoid running out of money. Establishing such a fund involves planning ahead much like a college student does when saving money all summer (creating a revolving savings fund) to draw on during the school months. You establish a revolving savings fund for two purposes: (1) to accumulate funds for large irregular expenses, such as automobile insurance premiums, medical costs, Christmas gifts, and vacations, and (2) to meet occasional deficits due to income fluctuations.
Table 3.10 shows the Johnsons’ revolving savings fund. When preparing their budget, the Johnsons realized that in June, August, November, and December they were going to have significant deficits. They decided to begin setting aside$140 per month to cover the June deficit. To do so, they decided to wait to start building their emergency fund. By June they had $700 in their revolving savings fund to cover the June deficit. Continued use of the revolving savings fund helped them meet the August and November deficits as well. The Johnsons will still be $1050 short in December. Lacking that much money, the couple has three alternatives: (1) use some of Harry’s trust fund money to cover the deficit, (2) dip into their
Effective management of cash flow can involve curtailing expenses during months with financial deficits, increasing income, using savings, or borrowing. If you borrow money and pay finance charges, the credit costs will further increase your monthly expenses. For this reason alone, it is smart to “borrow from yourself” by using a revolving savings fund. This is a variable expense classification budgeting tool into which funds are allocated in an effort to create savings that can be used to balance the budget later so as to avoid running out of money. Establishing such a fund involves planning ahead much like a college student does when saving money all summer (creating a revolving savings fund) to draw on during the school months. You establish a revolving savings fund for two purposes: (1) to accumulate funds for large irregular expenses, such as automobile insurance premiums, medical costs, Christmas gifts, and vacations, and (2) to meet occasional deficits due to income fluctuations.
Table 3.10 shows the Johnsons’ revolving savings fund. When preparing their budget, the Johnsons realized that in June, August, November, and December they were going to have significant deficits. They decided to begin setting aside$140 per month to cover the June deficit. To do so, they decided to wait to start building their emergency fund. By June they had $700 in their revolving savings fund to cover the June deficit. Continued use of the revolving savings fund helped them meet the August and November deficits as well. The Johnsons will still be $1050 short in December. Lacking that much money, the couple has three alternatives: (1) use some of Harry’s trust fund money to cover the deficit, (2) dip into their
emergency savings in December, or (3) cut back on their expenses enough throughout the year to create sufficient surpluses. Ideally, the Johnsons want to have sufficient emergency funds by the end of the year to establish their revolving savings fund for the following year. Cutting back on expenses may be their best option
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