Budget Worksheet Part II

In Budget Worksheet Part I, we explain how to go about creating an annual budget, and where you can find these budgeting tools - for free.  We also walked through the basics of creating a healthy, and sustainable, family or household budget

A financially-healthy budget is one that is sustainable in the long term.  In our previous article in this two-part series, we started using the budget worksheet.  We worked our way down through the household income section, and now it's time to look at the second half of the equation:  household expenses.

Family Budget Basics - Expenses

As we go through each expense section of the budget worksheet, it would be helpful to think about essential expenses versus discretionary expenses.  The harsh reality is that many of us have limited sources of household income.  If annual expenses exceed annual income, then you can either lower your expenses or find another source of income.

Essential Family Expenses

Essential expenses are the last ones you would ever think about eliminating.  For example, if you have a secured loan such as a mortgage or car loan, then you really need to keep making those payments.  Groceries are another example of essential household expenses, you need to eat.

Discretionary Family Expenses

Discretionary expenses are the ones that you could eliminate, or reduce, without too much pain.  Now this can be quite subjective, so coming up with examples that won't offend someone can be difficult.  Without giving a specific example, the expenses that are likely discretionary include entertainment, recreation, vacations, subscriptions, and personal expenses.

Home Expenses

This next category of expenses on the budget sheet has to do with owning and maintaining your home.  The mortgage payment is normally level throughout the year, so the spreadsheet is set up in a way that allows you to populate the January number, and the rest of the months mirror that number.

Most of these remaining line items are pretty self explanatory.  You should know right away the cost of items like your cell phone bill each month.  For others, such as home repairs, you might need to go back and look at records of your past credit card statements.  Line 12 on the worksheet is labeled Utilities.  Generally, utilities should include expenses associated with electricity, natural gas, heating oil, drinking water, and sanitary sewer.

Daily Living Expenses

This category of expenses includes items such as childcare, groceries, and dining out.  This last item is something that you might think of as discretionary - at least part of it.  Again, unless you carry around a lot of cash, then your credit card statement should give you a good feel for how much you spend each month on your daily living expenses.

Entertainment Expenses

We all know many people have the outlook of work hard, play hard.  But some of the costs in this category are probably more discretionary than essential.

Transportation Expenses

This category has more essential expenses than discretionary ones, since much of your transportation expense should be related to commuting to work.  Here you would list things like parking, mass transportation expenses, and gasoline for your car.

Health Expenses

These expenses are a mix of those that keep you healthy, and those that are a result of illnesses.  The copayment line is where you would put all of the expenses to see doctors that you pay for directly, not those that are reimbursed by your medical insurance. 

There is also a line item for life insurance that you pay for directly.  This brings up a good point.   If you need to change a line item, just type over a line you don't need.  Some people pay for homeowner's insurance in their mortgage payment.  If not, then overwrite another line item or put it in the category of miscellaneous payments.

Vacation, Recreational, Dues, and Personal Expenses

By now you should be getting a good feel for the budget worksheet, and the sources of information you need to fill out the sheet.  Don't guess, if you don't have to, for an expense.  If you're having trouble keeping out of debt, then chances are you don't understand how much you spend on certain items.

Just the act of creating a budget goes a long way to enlighten people as to exactly where their money goes each month.  In other words, it's a valuable exercise just to go through this budget planning process.

Budgeting for Financial Obligations

There's an old saying that is worth sharing here - Pay Yourself First.  What does that mean?  The phrase "pay yourself first" means that before you pay anyone else, make sure you've kept some money for yourself.  This is not cash you're going to spend on a gift for yourself; this is an investment in yourself.  This is money that you put away for your future.

In many ways, you have a financial obligation to yourself.  Make sure you have money that goes into a 401k, 403b, or IRA account.  Invest in your future because it feels good, and that's a very important component of a good budget.

Evaluating a Budget

Once you've filled in the worksheet with all your expenses and sources of income, take a look at the last line on the sheet labeled Cash short / extra.  Don't worry if some months show that you are cash-short.  Depending on your software or spreadsheet setting, a cash-short month will be in parenthesis, in red, or with a minus sign in front of it. The most important rule for your budget is that the entire year, your annual budget, is not short of funds.  This is at the far right end of the last row on the worksheet.

If you're short for the year, then double-check your spreadsheet and see if you made any glaring errors.  If not, then start to think about the discretionary expenses.  Start with the less painful ones, and keep working back until your year end number is positive again.  It's always advisable to put some cushion in there too.

Unexpected expenses usually appear each year.  In addition, most individuals are optimistic when establishing a budget.  They think they'll spend less or have more money in a given year.  A cushion removes that optimism and risk of an unexpected expense. 

Finally, creating an annual budget is not the end of the story; it is really just the beginning.  Track your monthly expenses, and enter the actual expenditures into the spreadsheet throughout the year.  Evaluate each month to see how your budgeted forecast compared with the actual amounts, and keep making adjustments.  Have fun with it, see if you can beat your budget, and reward yourself if you do.

Other Budgeting Tools

Finally, take advantage of the other budgeting tools or calculators we have on this website.  If you're having trouble making all of your debt payments, then maybe refinancing a loan or a debt consolidation loan can help.

If you're trying to benchmark your household budget against some national statistics, we even have a family budget calculator that can help you compare your household budget to the national average.

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