The Basics of a Sound Budget

   Hey everyone out there in cyber-land, today, if the name of the post didn't tell you, I would like to talk about what should be a simple but complicated thing to manage a budget. Now this is not going to be a plug and play budget but more of an outline of were your money should be placed.   We have all been guilty of it. Either because we were never told, shown or just have seen bad budget habits in the past. Even myself, as a financial planner, messed that up in the beginning... now once we (my family) realized how out of alignment our budget was, the true work came in. Cutting here, readjusting there.. See once we fall out of financial alignment we can't just hit the proverbial reset button. All we can do is align it from that point forward and if need be, be willing to sacrifice some creature comforts till we are back in alignment.
 
   Now there are a lot of different theories on proper distribution of income to the financial plan, I am going to talk about the one that helped us and are currently using. Since I will be using our situation as an example, you must know a bit about myself. As a financial planner, most of us work off of commissions.. as such income is a general guessing game... now career professionals can get a good idea of whats in-store based on appointments, work ethic etc... but since one month its possible to make $800/month and the next.. $8000+/month we really need to budget for the rainy days and save during the sunny ones. This is true for any business owner, independent agent, real-estate agent or job were the bulk of your income comes from what you produce. We learned this the hard way, but are getting better. See the key to a budget is you keep on adjusting it and you keep learning. The moment you stop learning about your finances is the moment you get into trouble. Lets take a look at how a budget breakdown in % form should look like..

   As you notice the monthly income is split into 3 categories. Lets look at what each category means.  "Must-Have Expenses" now this is true must have, like things needed to live. Not just things you really want.. lol.. so for example.. Housing, utilities, groceries, car payment, auto/home/life ins (yes I believe that auto/home/life ins is a must have) the things you must keep at mminimum to live not included.. are cable, internet, cell phone, those are wants and when we really ask ourselves we can live without them, lol I would be hard pressed to cancel them as well but they don't fall under "Must-Have Expenses". 

The "Wants" section are the things that can be cut down in times of needs, like eating out, entertainment/cable, cell phone, hobbies, shopping for extra stuff.

The "Savings" section is for things we are saving for, retirement, investments, emergency accounts, college funds. Lets take a look at a typical family and how that would break down...   

   So the typical american household according to the Census Bureau in 2012 (2013 not released yet) is a hair over $51,000.. so lets just keep the number nice and say $50,000 a year for a family of 4. If that sounds low.. yes it is.. especially since its basically the same as it was in 1989, well actually you made about $600 more but that's for another blog.. lol..

   

   So taking that $50,000 then allocating them to the budget set up above will give you a great way to make sure you don't fall into financial problems.. so lets do a ruff one..

$50,000 split into 12 months.. is 4,166.66 so lets just say $4,100 a month... If we stay to the budget % above.. Must-Have will receive $2,050 a month.. with that in mind.. I would recommend that housing do not exceed half of that.. so $1,025 towards your house mortgage or rent. The other half.. goes to utilities, groceries, car payment and insurances. Some of you might already be saying.. wow how the heck can I live off of just that.. well chances are you are already over extending yourself or not properly saving for your future.. As I said earlier.. we are guilty of it ourselves.. Since income can fluctuate in my career, we had to base it off the steady income and then add the extra at that comes from the previous month to the budget. More work but it keeps you on track.. 

   The Wants will receive 30% of the $4100, so that's  $1230 for your families wants.. so that's cable, cell phone, eating out or just some extra shopping. My personal belief is you want this section to be a bit higher then savings.. reason is, I will use the diet analogy, if you take away everything a person enjoys eating they will struggle keeping to it BUT if you allow them to have a small treat within a plan, they can except that easier. 

   The Savings will receive 20%, so that's $820 towards savings/retirement/college fund.. That $820 if allocated correctly can go along way.. we will touch more on the 20% savings and where they should be allocated in the future but we believe that if you can align your money to these sections you will be in a great financial situation. I also know that many people have credit card debt and for those who do, we will touch base on that in the future as well. There are exceptions to all rules, but one thing we have come to understand in our own life and path is that each exception/problem has a solution.. its just a matter of the price your willing to pay to reach that solution/goal. 

    Lol I know there are probably misspellings and other errors... but this is a finance blog so my apologies to the English majors and teachers. Now the math and financial professionals of the world. If something doesn't add up or you have a differing opinion.. please let me know.. I am always willing to hear and learn from other professionals.. 

   If you have any questions or would like help with your own budget. I am more then willing to help. Just drop me a message below and I will help you set up, adjust and plan with anything I can.. till next time.. 

Best Wishes,

AXI C.