Budget design can range from a simple, broad-brush plan to a complex,
detailed plan complete with profit centers, cost centers, chargebacks, etc.
The basic thing to remember when designing a budget is to provide only that
amount of detail necessary -- no more and no less. This rule hold true
whether the budget is for a household or for a multi-million dollar
organization.
The first step to designing a budget involves reviewing your financial
history. If you don't have good financial records, use an educated guess
about the costs for items to be included. Group these items as appropriate
to provide the desired level of detail. For instance, assume we are
building a personal budget and that we do not have good financial records.
We can use the last transaction for each cost to build a budget and adjust these
figures anywhere we have a good idea that the average cost per month will vary
substantially. The following example illustrates the point:
Roger has not kept good financial records, but he wants to correct his
financial course and knows he needs a budget to help. His paycheck is
his only source of income. Looking back through his checkbook, he finds
the items and costs shown below. He also knows that certain costs vary
depending on the time of year, so he makes adjustments to these costs.
MONTH: July
| ITEM |
ACTUAL $ |
ADJUST |
BUDGET |
| INCOME |
|
|
|
| Salary |
3,000 |
0 |
3,000 |
| EXPENSES |
|
|
|
| Savings |
0 |
50 |
50 |
| Food |
400 |
0 |
400 |
| Medications |
100 |
0 |
100 |
| Utilities |
350 |
100 |
450 |
| Mortgage |
850 |
0 |
850 |
| Car Note |
425 |
0 |
425 |
| Clothing |
250 |
-150 |
100 |
| Credit Cards |
600 |
0 |
600 |
| Remainder |
|
|
25 |
Now that one month's budget is built, Roger can use these figures as a
springboard to build the other eleven months of the year. During the year,
Roger should keep accurate records and compare actual results to budgeted
figures. In some cases, budgeted figures should be adjusted; in others,
actual costs should be managed closely to prevent these costs from exceeding
budget.
This is obviously a simple example, but the points
illustrated hold true regardless of the size or purpose of the budget.
Many
bookkeeping and
accounting software packages allow you to add budget figures and generate
reports that compare budget and actual figures, but if you don't have software
just use a thirteen columnar pad which can be bought at any office supply store.
If this looks like too much work, reduce the size of the task by just creating a
budget for costs you can control. In the example above, Roger's current car note, mortgage, and
medications may not change, but he may be able to find ways to reduce his
utility bills, clothing purchases, and even food expenses in any given
month. In months where some costs increase (such as when he has to buy
clothes to get his daughter ready for back-to-school), he can look for
ways to reduce other costs -- even spreading the reduction over two or
three months to lessen the impact on a particular month and still keep
annual costs in hand. By just watching the items Roger can hope to
control, he can still keep overall costs under control and perhaps find
new ways of saving a few extra dollars.
One other point: Roger is lucky; he actually has money left
over at the end of his bills. Notice, however, that Roger is
starting a new philosophy:
pay yourself first. By
planning to save $50 each month, Roger will begin to build a sizeable
fund for emergencies, investment, etc. In reality, even this may not be
possible every month, but by creating a budget goal, Roger will better
maintain the discipline necessary to find and save those few extra
dollars.
