Approach One: The Computerized Approach
There are many excellent computer programs available that allow for fundamental budgeting. For example, Quicken Basic, which is a powerful tool that does everything from keeping a computerized reconciliation of your personal checkbook, to charting the remaining mortgage amount on your home, to keeping a tally of how your investments are performing. This and other budgeting programs not only will keep a running tab on things but also will store necessary records for tax purposes and provide charts and graphs illustrating to what extent you are under-or over-budgeting for specific items. Thus, if you are somewhat computer adept you will want to thoroughly explore maintaining your budget via your computer. Go to my Web site (http://www.personal.kent.edu/~maltieri/web/guide/ home.htm), click on Budgeting Programs and then Quicken Basic to review this program or preview Quicken Basic at virtually any store that sells computer programs.
Here is the hitch. You must diligently input all of your budget data, typically on a daily basis. For those of us who work long hours, have major family commitments and/or are not computer adept (or do not have a computer adept spouse), the efficiency of the computerized budget quickly begins to break down. Although it is highly recommended that you at least attempt to maintain a budget through a computerized program, many of you (like me) will default to budgeting on a manual basis. The following describes how I maintain my non-computerized manual budget.
Approach Two: A Manually Maintained Budget
As with the computerized budgeting approach, your first step will be to determine your inflow, that is, your revenue stream. If you are an employee, this will be your take-home pay. If your tax withholding amounts have been computed properly, your take-home pay is your after-tax revenue. Federal, state and local income tax and social security taxes have already been withheld. In addition to your tax withholding, if you are making pre-tax contributions to your company's Section 401(k) plan or to a Section 403(b) annuity (both of which are discussed in detail under the Retirement Planning section of this book) or are required to contribute toward the cost of your health coverage, those contributions will also have been deducted from your paycheck in arriving at your net take-home pay.
Figuring your after-tax revenue is the easy part. Now you have to determine your outflow (your expenses). Sit down with your spouse and write down all your recurring monthly expenses. For example, with regard to monthly recurring expenses my wife and I have noted the following items: home mortgage, utilities (electric, gas, phones, water), TV cable access, normal credit card charges, food, and general miscellaneous. By the way, a very convenient device to help you in the monthly budgeting process is generally available through your utility companies. If you call up your water or electric or natural gas utility and talk to the people in the Billing Department, they will be able to assist you in estimating your utility costs over the year by looking at your past usage history. They will then bill you on a level monthly basis in the future. If the usage estimate proves to be too high or low, an appropriate adjustment will be made going into next year.
Now that we have attended to your recurring monthly expenses, you will also have to compute significant expenses that you incur during the year but that do not recur every month. For example, under this non-recurring category, my wife and I have isolated the following expenses: home property taxes, car insurance, home insurance, and life insurance (all of which we pay semi-annually), Christmas, vacations, birthdays, and an emergency (rainy day) fund.
By dividing the non-recurring expenses by twelve, you will arrive at a rough monthly estimate of these non-recurring expenses. The recurring monthly expenses should be paid from your primary checking account. With regard to your other expenses (the non-recurring ones) recall that you and your spouse have estimated those expenses for the year and divided that annual expense number by twelve. Each month you should deposit the monthly amount you need to accommodate these non-recurring expenses in a second interest bearing checking account (TIAA-CREF, noted in the Retirement Planning section of the book at page 94, has an excellent interest-bearing money market account on which free checks of $250 or more may be written). In this way, you will be building up a fund in the second checking account out of which you will accommodate these non-recurring expenses as they come due. By utilizing a second checking account for these non-recurring expenses you will keep them segregated and will be better able to determine if you are properly funding for them.
Now you are in a position to establish your inflow (your after-tax take-home pay) and subtract from that number your expenses (both the monthly and non-monthly expenses). In this manner, you can get a handle on how much money is coming in and where it is going. To the extent you are over or under estimating your expenses, you will make adjustments when necessary. If your revenue exceeds your expenses, you have additional wealth to increase your educational or retirement savings (discussed in detail later in the book) or to add to the "Rainy Day" emergency fund (mentioned above and discussed further in the Miscellaneous section of the end of the book). If your expenses exceed your revenues, you are either going to have to increase your regular revenue stream or decrease your expenses. Borrowing money to accommodate your recurring and non-recurring expenses is a formula for disaster that we will discuss in further detail in the Miscellaneous section of the book.
This budgeting system will allow you (perhaps for the first time in a long time) to track where your money is coming from and where it is going. Again, it is necessary that you do this if you desire to systematically live within your means and accommodate the many planning devices discussed in this book.