Hi! You may want to read my “Afraid To Budget” segment at http://edanielmillercpa.wordpress.com/2011/11/08/afraid-to-budget/ if you havn’t already before delving into the following.
I find many people don’t know how to go about beginning a budget once they have decided to do so. They know the budget will consist of income and expenses, but they don’t know what amounts to use or how to go about putting those items to paper–or whether they should even use paper. But you can use whatever you’re comfortable with. Pencil and paper will become tedious if you go beyond budgeting for one month (which you should), but you can certainly start that way if you feel better about it, and if it helps you get comfortable with it. However, since you want to budget 12 months out (don’t panic, it’s not that bad) you will want to move to a spreadsheet format.
Now, there are basically two types of budgets–a personal or household budget, and a business budget. If you own a business, like many of my clients, then you will want to create separate budgets for your business and your personal. It might seem easier, or even natural, to combine income and expenses from the two into one budget. However, if you do this, you will not be able to “isolate” problem areas because you won’t readily know if your business is carrying your personal, or if your personal is supplementing your business. And you want to know if your business is able to “stand on its own feet”.
I’m going to deal with personal budgets in this series of articles because a business budget has items that are not so readily determined by a lay-person as in a personal budget. For example, certain income may generate an expense you’re not aware of, wage expense to employees generates employer taxes that most cannot calculate alone, workers compensation expense based on wages may be involved, a certain type of business may be oblicated to pay franchise tax while another might not, and multiple other items that (if left out) could badly skew your business budget). If you need help with a business budget, it’s one of my favorite things to help people with, and I’d be glad to speak with you about it. You can contact me at dmiller@edanielmillercpa.com or (888) 734-3933.
And even if you’re a business owner, I suggest starting with your personal budget anyway. This is because the end result of your personal budget will largely dictate how your business needs to perform, and so then you can create the business budget with that in mind. For instance, let’s say you create a personal budget (that excludes business income, although it includes wages/salary that you or your spouse make apart from your business) and it nets to zero (total income and total expense are the same amount). If you want it to net to $1,000 (if you want $1,000 left over at month end), then you know that net income of $1,000 is what your business budget will need to reflect for that month (because that $1,000 nent income will then be inserted as an income line item on your personal budget, thereby creating the $1,000 personal net income you desire). See the following:
Income $500
Business Net Income —-
Expense (500)
Net Income $0
Income $500
Business Net Income 1,000 (From Business Budget)
Expense (500)
Net Income $1,000
This is a simplistic example for the sake of this lesson because, in reality, there are tax rules as to whether you can simply cut yourself a $1,000 check from your business and deposit it to your personal bank account.
Before continuing, I want to point out that the budget is a “plan”. It’s an “idea” of what will happen financially in future months based (largely) on what has happened in previous months. Don’t even worry about cents, but instead round to whole dollars; you’re only estimating, and you’re not going to get each amount exactly correct. And even though you’re budgeting for 12 months, that doesn’t mean you can’t change items one, two, six months in as things come up, or as income/expenses become clearer. Don’t be hard on yourself!–it’s a plan. I suggest that couples create their personal budget together; I suggest they both have input in what amounts should be. Even if one person is more organized and patient, while their mate is bored and hates sitting still for very long, it’s better they both be involved (at least initially) so both are on board with carrying out the budget (rather than one or the other saying later “I didn’t agree to that”). I would further suggest putting aside any blame that may exist before actually coming to the table to formulate the budget. For instance, let’s say one partner has perhaps incurred a lot of debt–or has entered the relationship with existing debt, and the other partner is resentful of this because their earning power will be helping to pay it off. It would be better to settle those feelings prior to actually sitting down at the table to plan the amount that will pay off the debt. Creating a budget between couples can many times bring up some uncomfortable memories :)
Please feel free to contact me with any questions or if anything doesn’t seem clear and I’ll be glad to help! You can reach me at dmiller@edanielmillercpa.com or 888-734-3933. Also, please visit my website at www.edanielmillercpa.com. My upcoming budgeting blog will give you some help on how to go about calculating income and expense amounts. Thanks!–Daniel
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