Every company goes through an annual planning and budgeting process to operate their business, so they are able to meet both fixed and capital expenses—making changes as needed to react to inevitable ups and downs in the market. To grow their business, they may need to purchase new equipment, expand into new facilities and/or research and develop new products. All of these anticipated costs are put into different budget line items, and cash flow is allocated accordingly. Quarterly reviews are usually conducted to make sure the company is on track to meet its budgetary goals for the current year, as well as five years out.
Individuals and families, likewise, can benefit from the same disciplined practice of preparing a personal/household budget on an annual basis, and then reviewing it at least every six months (I personally do it quarterly because things change and life happens). It’s important to keep this budget going at every stage of life, regardless of how much money you earn or have saved. Even high net worth individuals can run out of money at some point if not responsibly managed! Without a budget, you are apt to over-spend, go into debt and simply be unable to fulfill your short- and long-term goals (like buying that dream house, taking two ski trips a year, sending kids to college, etc.).
Based on years of experience working on my clients’ budgets and my own, I have come up with a list of considerations to help guide you through the process. Not all items apply to everyone, but it’s a good place to start and then customize your own budget, tailored to your unique needs.
- Fixed costs: Take an inventory of your monthly bills (mortgage/rent, car payment, utilities, groceries, cell phone, cable TV).
- Home ownership: Include property taxes, home owners’ association fee, home insurance, maintenance (the lawn guy, repairs).
- Income taxes: Set aside approximate income tax liability for federal and state (as applicable), after consulting with your accountant.
- Entertainment: Estimate what you will spend on having fun (dining out, the movies, theater going, golfing).
- Clothing: Depending on where you work, it may be necessary to keep up a professional work wardrobe, as well as casual wear. This includes purchases and dry cleaning.
- Child-related costs: Raising children is expensive. If you do have kids, take into account the cost of daycare, day camp, school and ultimately college.
- Travel: Whether you take one, two or three vacations a year, figure out the price of airfare, hotel and other associated costs for each destination.
- Donations: If inclined, make charitable contributions to non-profit organizations on a regular or one-time basis throughout the year (remember, they’re tax deductible).
- Retirement savings: Set aside a certain percentage of your earnings either through an employer-sponsored retirement plan or one of your own to ensure financial security later in life.
- Emergency fund: It’s important be prepared for the unexpected by setting aside money to cover things like car repairs, home repairs, health matters, etc. Six months of expenses is a good rule of thumb.
- Miscellaneous: While this is optional, it is a nice catch-all bucket for mad money savings to purchase an outrageously priced handbag, briefcase or pair of shoes that just make you feel good.
- Special events: Celebrations like weddings and other milestones can throw off a budget if not planned for in advance. This requires a separate budget of its own.
While each person’s budget will be different, be sure that yours aligns with your specific goals and plans. Creating this type of budget for your life takes a lot of the stress out of monetary issues, making those big financial decisions a lot easier when you know how much you have to spend. Sticking closely to a budget will help ensure the funds are there when you need them. And, like any profitable business, you will thrive and grow your assets.
If you’re like me, you’ll create your own spreadsheet in Excel and start taking control of your money. You can also click here to jumpstart your budget with an easy, online tool. As always, complex money questions around taxes, investing, retirement or major purchases are best answered by a professional.