Budgeting

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.

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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.