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Budgeting – Fundamental tool to manage money

The two keys to money management are creating an effective budget that will reflect your day to day financial life and then having the discipline to follow the budget. There are five stages in the process:

First: Make a thorough list of all your necessary, customary and usual expenses of daily, weekly, monthly and annual living. This includes vacation expenses, child expenses, hobby and recreation expenses, gifts, charitable and religious donations, etc. Leave nothing out. But, exclude all savings and investment activities.

Second: Determine the amount of those expenses by their customary time periods, annualize them all, and total each time period.

Third: Add a variance factor of between 10-20%. This is to take care of any variations due to price increases, unusual weather experiences, accidents, unforeseen events, etc. The amount of the variance factor is a judgment you make based upon whether you run have historically operated your household and family expenses conservatively or loosely. This total is your initial budget that you should be able to easily live within.

Fourth: Your total budget for the year now needs to be compared to your sources of income adjusted for taxes, social security, and other reductions and adjustments. In situations where you pay for medical insurance and other similar services by payroll reductions then your budget may need to be adjusted to avoid a duplication of the expense. Where you receive reimbursement for auto and travel expenses adjustments may also have to be made to arrive at accurate amounts. Once these adjustments have been made and you have been able to arrive at your excess income over all expenses and allowances you can then compare the net with what amounts you have been setting aside for savings, retirement, etc.

Fifth: This involves carefully reviewing all your prior determinations of expenses and income to find items that perhaps could be eliminated, avoided or reduced by a change in personal or family habits or commitments. The goal is arrive at the sum you can save for investment or other purposes as long as there are no fundamental changes such as loss of job, securing a new job, substantial raise in income, etc.

Doing this today is far easier than before because of computers and their budgeting programs. Green Tree Planning does not recommend any particular brand or type of computer software. However, many clients have reported success with the Quicken family of products. There are others and often your accountant will have an important impact on your choice because of ease of transferring data for tax return preparation.