To know where you’re going on your personal financial journey you need a budget. You need to know where you are, where you want to go and how to get there. And you need to keep track of your progress along the way, so when you take a wrong turn you can get back on the right road. In short, you need to create a budget and ensure you follow it by using a personal spreadsheet.
A budget, especially in conjunction with a personal spreadsheet, is a tool to help you manage your money and reach your financial goals. Your budget and ability to use a personal spreadsheet are for your own benefit, to help you take control of your finances. Having a budget and sticking to it with the assistance of a personal spreadsheet can help you feel more secure and more empowered in your decisions. Your budget and personal spreadsheet should therefore be personalized to your unique situation and your individual plans and goals. And they should be workable. You know your own aptitude and tolerance for record keeping. Maintaining a budget with a personal spreadsheet requires discipline, but the exercise should not become so cumbersome that it takes up much of your time and causes you to lose your motivation.
You can manage your personal finances with various types of software and downloadable spreadsheets, but creating your own personal spreadsheet is not difficult. The advantage of designing your own is that it will be uniquely adapted to you and how you want to manage your financial affairs.
Where You Are
To get started in preparing your personal spreadsheet, you need to gather information on your income and expenses to determine where you are financially. Your income includes your paycheck from work, income from self-employment, interest and dividends on investments, income from rental properties, and in general all the money you take in. On your personal spreadsheet you should show each type of income on a separate line.
When beginning a personal spreadsheet, you’ll also want to identify what you are currently spending your money on. To determine this, you can go through your most recent month’s bank statements, and credit and debit card statements. This will depend on how you pay your bills. Your personal spreadsheet should include all the expenses you pay through direct debits to your bank account, including any bank charges, the bills you pay by check, and everything you charge to a credit or debit card. To determine how much you are spending in cash, you can estimate these expenses to get started with your budget, and then keep track of them with the personal spreadsheet each day to get a clearer idea of where your cash is going. Remember that for budget purposes minor expenses can add up. You can be surprised by how much they amount to when you tally up the totals on your personal spreadsheet at the end of the month.
On your personal spreadsheet, set up lines for each major expense, such as your mortgage payment or rent, car loan payments, student loan payments, insurance, taxes, utilities and telephone. Then group together all your other expenses into categories such as groceries, gas and transportation, clothing, school expenses, medical and entertainment.
Each person’s finances are unique, but there are some general categories that most spreadsheets incorporate, including: savings, housing, utilities, food, transportation, clothing, medical, recreation and debt.
By separating your expenses between needs and wants on your personal spreadsheet, you can start to get an idea of where you have room for flexibility. As you go through your past payments and your bills pending, you will get some idea of which expenses are fixed and which could be more flexible. Think about where you’re able and willing to compromise.
How you set up your personal spreadsheet in terms of time periods will depend on how often you receive your income and how often you pay your bills. For many people a monthly budget is the most manageable, but if you are paid bi-weekly or weekly, you may be more comfortable with a budget based on those intervals. You could even set up a calendar-type spreadsheet in which you input your income and expenses on the dates they are scheduled. This also allows you to budget and control cash expenses daily. What is important is to match your income with your expenses, to be able to determine your net cash flow each period. You need to be able to tie what you’re taking in with what you are spending it on.
Where You’re Going
The idea of using a budget with a personal spreadsheet is not just to estimate your income and expenses and then keep track of them. The idea is to use your budget and personal spreadsheet to guide and direct you toward your financial goals. So you need to build these goals into your personal spreadsheet. Do you want to save more for retirement, vacation or college? Do you want to pay off debt more quickly? Do you have a purchase in mind? Quantify these goals and set them up on separate lines in your personal spreadsheet. This is the aspect of budgeting that puts you in control of your finances.
The basic budget equation is that income must be greater than or equal to expenses. Otherwise you’re in a deficit, which you can sustain only in hardship or emergency situations and only for a limited time (until your credit and/or savings run out). In this situation your goal is to make the necessary adjustments to live within your means, by reducing your expenses or increasing your income. A budget can help you separate the wants in your life from the needs, providing you with the extra funds you need to survive times of economic hardship. This is also the way to channel more money into meeting your goals. If you’re currently breaking even, you’ll need to take money from some other line in your personal spreadsheet and apply it toward your goals.
You should extend your personal spreadsheet far enough into the future in order to be able to see the overall direction you are taking and how you are progressing toward accomplishing your goals. This may be a few months or a year. Projecting too far into the future involves a lot of uncertainty. You want your budget and personal spreadsheet to be realistic in order for them to be effective financial planning tools. But you should also remember that it is your budget and personal spreadsheet – you can adjust them as circumstances change.
How to Get There
With your personal spreadsheet as your road map, you’ll need to keep track of your progress. So your personal spreadsheet should include columns for the budgeted amounts, the actual amounts you spend, and the variance. The budget column of your personal spreadsheet will include some fixed amounts that you know (rent or mortgage payment) and other amounts that will be estimates (groceries and entertainment).
If you set up your personal spreadsheet on a cash basis you should include your projected cash or bank balance at the beginning of each period. Your income minus your expenses for the period will determine your net positive or negative cash flow for the period. When you add or subtract this net cash flow from your opening cash balance you should arrive at your projected cash balance at the end of the period. Then when you fill in your actual expenses you can tie the personal spreadsheet back to your bank account at the end of each period. This way you can be sure that you’ve accounted for everything in your personal spreadsheet.
You can combine the budget on a cash flow basis with your credit card activity. If you pay a lot of your expenses by credit card you may want to set up a separate personal spreadsheet for each credit card. In this case you would start with the balance outstanding on your credit card at the beginning of the month and then add your charges during the month, plus finance charges, and subtract your payments to arrive at your projected credit card balance at the end of each month. You could include a line in your cash flow personal spreadsheet for payments on your credit cards, and this line would tie to your credit card personal spreadsheets. This way you can break down and analyze your credit card purchases according to your budget, rather than just include an estimated payment on your credit cards.
The purpose of your budget and personal spreadsheet is to get you where you want to go, and not just show where you are under- or overspending. By examining the differences between your budgeted and actual amounts on your personal spreadsheet you can determine where you need to make adjustments. These adjustments may involve minor fine-tuning of your spending habits, or major changes in your lifestyle. What’s important is your destination – what do you need to do now to get where you want to be?
Sources:
quicken.intuit.com/
www.smartmoney.com/spending/budgeting/3-easy-ways-to-simplify-your-financial-life-23720/
http://office.microsoft.com/en-us/templates/TC010233411033.aspx
www.vertex42.com/ExcelArticles/how-to-make-a-budget.html
http://20somethingfinance.com/
