Friday, December 26, 2008

Family Budgeting for 2009, part 2

Financial Friday by David W Barnett, ChFC, FLMI

Family Budgeting for 2009

Part 2 – Analyzing your Spending

Last week, we began our Financial Friday series on budgeting with an explanation of how to gather information that will help you prepare a budget. All the information in the world is useless if we can't process it into usable knowledge. Embrace this formula: INFORMATION + ANALYSIS = KNOWLEDGE. We need knowledge about our financial needs, habits and trends to create an effective plan for 2009. This week, I want to give you some practical methods for analyzing your cash flow.

If you completed the steps I laid out last week, you have a significant database of your financial transactions throughout the past year, classified and categorized. Now, you need to subtotal your transactions by category. Some spreadsheets have a subtotal function where you can sort and subtotal automatically. Otherwise, you will have to sort by category first, then total up the transactions within each category.

Once you have the subtotals, compile a list of the categories with the totals, and sort the list by class (income vs. expense). Then, total all expenses and all income for the prior year. Here's your first point of significant analysis – compare your total expenses to your total income. If your income is more than your expenses, congratulations! If not, you have work to do. As my father always told me, “If your outgo exceeds your income, then your upkeep becomes your downfall.”

The next analytical step is to divide your income and expense totals by twelve, which will give you an approximate monthly amount for income and expenses. Realize that not all income and expenses are monthly; for example, you might have income taxes or property taxes that occur quarterly or once a year, or you might get a bonus from your work that increases your total income but doesn't come until the end of the year. We can plan for irregular transactions in the budget, but for now we're just trying to see overall trends.

Next, we're going to do a little spreadsheet math that will be meaningful. You need to determine how much percentage of your total income is used by each expense category. The formula is simple – let me illustrate. Let's say that your total income is $4,000 per month, and your housing expense (apartment lease or mortgage payment) is $1,000. Your housing is 25% of your total income ($1,000 / $4,000). We will use these percentage results in formulating your family budget in Part 3. For now, just do the calculations. However, as you do them, some figures will probably begin to stand out to you. I'll never forget a few years ago when I was working on my own budget, and totaled up the restaurant expense for my family. There was one month where our eating out was over $1,000! Needless to say, that was obviously an area that needed to be addressed in our budget planning.

After you have calculated all the totals and percentages, take some time to look over the numbers and find the areas that really stand out in your mind as significant, extreme, or unusual. Make notes and put on your thinking cap about the areas you want to change for 2009, and how you would like to change them. Next week, we'll discuss the final stage of budgeting, which will be to plan and write your personal budget for the coming year.

Once again, if you would like me to send to you helpful resources for budgeting, such as spreadsheet templates and category lists, or if you have other specific questions, I would be happy to hear from you. Please contact me via e-mail at

Mr. Barnett is an investment advisor and financial planner and has been a professional in the insurance and financial services industry since 1984. He is a Chartered Financial Consultant and Fellow of the Life Management Institute. © 2008 David W Barnett. All Rights Reserved.

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