Friday, December 19, 2008

Financial Friday, part 1 - Family Budgeting for 2009

Financial Friday by David W Barnett, ChFC, FLMI

Family Budgeting for 2009

Part 1 – Information gathering

As we look toward the start of a new year, I would like to take the next three weeks to give you some helpful suggestions for managing your family finances in 2009. The key to taking control over your finances is to have a well-designed and workable budget.

Budgeting scares many of us because we misunderstand its purpose. Often, we think of a budget as an inflexible tool of confinement that is destined for failure because we can never definitively forecast our financial needs. But, if done right, a budget is an outstanding ruler by which we can measure our financial performance, just like we use a tape measure to see how our children grow. In this first article, let's begin the budgeting process by gathering financial information.

In order to put together a practical budget, the best place to begin your search for figures is with your current income and expenses. If your situation is typical, there is a wealth of data available that you may not even realize:

1) Your paycheck – your final paycheck of the year will likely have year-to-date totals for your gross salary, tax withholding, and voluntary deductions such as insurance or retirement.

2) Your bank account – if you use online banking, you can usually download all your transactions into a spreadsheet format. Some banks only give you access to the most recent six months of activity, but with a little additional effort and some coaching, you can import the entire year.

3) Credit cards – just like your bank account, you can access your account history online and download your transactions.

4) Account statements – your checking account statement (with check copies or images) or your check register may give you details beyond what you can download.

These sources should provide information for the vast majority of your transactions throughout the year. Even if you frequently use cash instead of checks or credit cards, most people pull cash from their accounts using the ATM, so those cash withdrawals will show up in the history. Don't worry if you don't have every single transaction listed; for now, we're not trying to reconcile accounts, just get a good overview of income and expenses.

Once you've collected as much itemized information as you can, combine it all into a spreadsheet where you can work with the data. Once we have the data consolidated in a single spreadsheet, we need to classify and categorize the transactions. This step will enable us to analyze our cash flow (we'll discuss Analysis in Part 2). What does it mean to “classify” your transactions? There are four main classes in finance; income, expense, asset, and liability. Since we're working on a budget, we're mostly concerned for now with income and expenses. Simply put, income is what you make, and expenses are what you spend. Assets and liabilities are used to calculate your net worth (create a balance sheet); assets are what you own and liabilities are what you owe. We'll deal with balance sheets another time.

What does it mean to “categorize” your transactions? We categorize by grouping together transactions that are the same or similar. Some typical categories are things like rent or mortgage, groceries, fuel, restaurant, and clothing. You get to decide what categories you need. The key is to be detailed enough in your categories that you can identify specific areas in your budget that need attention, but not so detailed that you have too many subdivisions to be meaningful. For example, it's useful to separate restaurant expense from groceries, because even though both are about feeding you, one is discretionary (restaurant) and the other is not (groceries). However, even though you likely frequent several different restaurants throughout the year, there is usually no need to categorize McDonald's distinct from Subway or Sonic.

As you prepare to assign a class and category to each transaction, you may be able to sort the spreadsheet and group transactions together. For instance, if you use your debit or credit card, you can probably sort by the description field and have all the “Exxon” or all the “Kroger” transactions together and categorize them en masse. Or, if you write a check for $54.95 each month for your cable service, sort by the expense amount and it will put all of them together for you. Designate columns in the spreadsheet for class and category and get busy categorizing.

You will be amazed at how enlightened you become about your finances just from assembling this data. Knowledge is both power and control over your money. Use this week to get your data together; next week, in Part 2, I will tell you how to analyze the information in preparation for Part 3, Writing the Budget. 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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