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STEP THREE in Budgeting: ALLOCATING RESOURCES

Published by sam - 06/10/07 - 02:10:00 am

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There are three basic methods of budgeting to allocate your available resources: the expenditure budget, the accounts system, and the bank account budget.

The Expenditure Budget

The expenditure budget groups the data you have gathered by broad categories and smaller subcategories so that you can keep track of as much detail as your bookkeeping time will permit.  It resembles the cash flow analysis ledger you set up, but this ledger is for future expense, not past ones.

Whether you lead a relatively simple life with a few major expense categories, or a complicated existence calling for much payment per month, the format of the expenditure budget should be the same are that in table 6-2.  Down the left side of the page, list the expenses as well as your new spending or savings goals.

Across the top, you should have four columns per month.  The first column should indicate the actual or estimated amount spent on this item during this month last year.  The next three columns should reflect the budgeted amount for this year., the amount spent in the current period, and the difference or variance from the budgeted amount.

Next, fill in the estimated expenses, month by month, for the period being budgeted.  To estimate monthly expenses, divide your annual expenses, figured previously, by 12.  If there are cyclical variations—for example, if you spent more to heat your home in winter—adjust estimates accordingly.  Add in any new items you plan, and adjust projected expenses until your total income expenses are equal.

At this stage, you may have to revise your plan in order to attain your newly targeted goals.  For example, if you have been wanting to start a fund to purchase a boat, you may find you have to allocate money from other expense items in the budget to do so.  If you haven’t budgeted before, you may want to start with a three month period, but final product eventually should be an annual budget.

Now comes the part requiring time and discipline: doing the bookkeeping necessary to see whether actual expenses match the projected ones.  For most people, it’s easiest to fill in a ledger, whether manual or computerized, as the expenses are paid.  For example, if you pay you bills at the beginning and the middle of the month, take time to log the expenses in the budget sheet as well as in your checkbook balance record.  Or, if you pay bills as they come in, record the payments in the appropriate budget category as well as in your checkbook.

Not every expense will be paid out as a response to a bill.  Many will be made at the point of purchase by cash or check.  Record check purchases when you write the check or review your checkbook log from past week or two week period, and mark them in the budget record by the appropriate category.

For cash purchases, either continue recording amounts in a notebook or diary or form the habit of asking for receipts.  If you obtain receipts, keep them in an envelope or file until they can be entered into your expenditure budget.

Of course, not every penny can be tracked, nor should it be, because of all the record keeping that would be required.  A category should be established for “personal allowance” or “petty cash”, which allows each individual in the household to spend some money without needing to report it, other than by total amount.

Table 6-3 illustrates another system.  The affluent professional two income couple in our example has the necessary time, resources and inclination to carry out the most useful budget exercise.  The family has made the commitment to prepare a complete budget projection that includes last year’s expenses as well as variance analysis.

To start saving their children’s college educations; the family decided to cut back restaurant meals and travel from the amounts spent the previous year.  The money reflected in the “Budget” column for these items has been adjusted so that the education fund can be created.  But even with these changes, the family needs to add more into its budget for savings and investments.  This is the first budget effort will have to be revised with the objective of cutting down on their high current expenditures and allocating more resources toward the future.

The budget system describes above is the ideal for serious budgeters, because all the information’s required will appear in one location.  Those with little time or inclination to account for their expenses in such detail may want to consider one of the other methods.

Expenditure budgeting can be made simpler with a computer.  Since both receive commissions from their sales jobs, recording the variable income as well as expenses on a monthly basis is vital to make their budget work.  To provide budgeting flexibility, the couple decided to divide their expenses into fixed and variable.  Each month, their fist priority is to see that their fixed expenses are met.  Then variable expenses are handled.  In months in which commissions are low, variable expenses can be cut back.

Rather than keep a running total variances by item, the couple can scan the two columns headed”: Budget and “Actual”.  That quick review, coupled wit a look at the fixed and variable totals budgeted and spent, provides enough informations to make necessary adjustments.    For example, in January, variable expenses of $1,145 were less than the total budgeted amount of $1,208.  But in February, variable expenses came to $1,685–$502 above the budgeted amount—bringing February’s total expenses to $177 over income.  In March, exceeded total budget by almost $800.

 Computerizes spreadsheets can make the work of doing a formal expenditure budget much easier.  Columns can be established and programmed automatically to ass and subtract the figure you enter.  You can also program the computerized spreadsheet—which is simply an electronic ledger page—to calculate the difference between what you intended to spend and what you spent.  This calculation, called variance analysis, will be made each time you enter expenditure, thus providing a running tally for the serious budgeter.   Several home accounting software packages are also available.

Computers can simplify calculations and reorganization of your budget.  So even though it may take time to turn on the computer systems, boot a program, and key in data, in the long run they can save time.  Especially if financial affairs are sufficiently complicated to require an accountant, computerized records can save money as well, since presenting professionals with well-organized records will lower expensive hourly fees.

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