Assessing your Current Budget Situation

Basic Financial Plan

Before you can correct your situation or create a budget for your current situation, you will need to assess where you are financially. Have you written down all of your income, expenses, miscellaneous expenses, and infrequent expenses? Most individuals go through their mind, a list of what needs to be paid and when. They do not actually sit down and look at their financial situation in black and white. If you have not done this, then you need to do so. There should be three categories for your list:

  • Income and Additional Income
  • Recurring Expenses
  • Nonrecurring Expenses

Income and Additional Income

For income, you should only write down what is absolute. Yes, there is a potential that your situation could change within the year. A person could lose their job. But, for budgeting purposes, you are going to assume that your job is secure. You will want to list your gross and net income. The net income is what you receive after taxes, 401K and medical insurance deductions come out of your check.

Secondly, if there are two household incomes, list both.

If you have a part-time job, make sure this income is listed, regardless of whether you pay taxes on that money or not. If you do not work each week at this secondary job, then do not count it. For example, if you babysit 4 days out of the month and know this will not change you can write it down. However, if you never know when you will have income from a secondary job, then you should not include it. This is because it will not impact your budget. The funds cannot be 100% counted on.

For self-employed individuals, it is much harder to set up a budget in the same manner as a full-time career with a salary or hourly wage. Each month can be a different income. For self-employed people, you will need to use last years reported gross income to determine a budget. You might not make as much this year, as last, so after the first quarter, you will need to re-evaluate your budget. You will need to determine your first four months’ average income, and plan accordingly.

What about monthly payments you receive? Do you have an annuity or a structured settlement? (read more about structured settlements) If so, these monthly payments should be factored and counted as income. Did you know there is an option of cashing out your structured settlement for a lump sum payment? It’s your money, you should get it!

While you are taking special consideration working on your budget, you need to also pick the right structured settlement company. Don’t gloss over this important choice.

Recurring Expenses

These are expenses that happen every month, every quarter, or every year. For example, electricity, water, sewer, gas, internet, phone, and TV, are usually the top recurring expenses. Student loan, mortgage, and car loan payments are also recurring.

You can split this category into two: unchanging and average expenses. Unchanging expenses are mortgages and student loans. You know each month you must pay a specific amount. It will not change. Average expenses are utility bills. Each month depends on your usage, so from month to month the bill can change a few dollars to over $100. Like changing income, you have to average the monthly bills to determine what you will payout for the year. In a month, you will budget for $100 on electricity, but the bill is $50, so that $50 extra remains in the electricity budget and when the bill becomes $150 in winter due to heating expenses, you have the extra $50 from the over-budgeting you did in a summer month.

Even groceries can be averaged per month to help you spend less on food and household items. It just takes being a little savvy in how you spend what you allocate for groceries.

Nonrecurring Expenses

These are expenses that occur throughout the year, but may not happen next year. For example, if your dishwasher broke and you replaced it last year, you won’t budget for it this year. You can plan for these things, to a degree. For example, if you bought your water heater 30 years ago, chances are in a year or two, you will need money to replace it. If the roof on your home was replaced 25 years ago, with 20- year shingles you need to budget for a new roof. If your vacuum says it is good for 10 years and it has been 11 plan for a new vacuum. If you bought tires five years ago, then have the amount of tread left on the tires, checked and determine how much longer you can drive on those tires.

You can always get information for most non-recurring expenses. Colds, flus, other illnesses, and emergent situations are things you cannot plan for. You can’t say, well this year a snow storm is going to cause a tree to break a window. You won’t be able to say, “gosh, I’m going to have a car accident this month.” While you cannot predict emergent situations and illnesses, you can still set a budget. Knowledge is very powerful.

Things that Affect Your Lifestyle

There are certain things many of us do not contemplate as we are setting up our adult lives. Yes, you plan for a certain career by gaining education to work in that industry. However, you cannot always plan for the job you gain. You might work in one field for five years, switch to a new field, or get a promotion that moves you half way across the country.

As you assess your current situation, you need to have a hard look at the cost of living in your area. You can do this by looking at websites and Forbes magazine. There are quite a few places that have started making cost of living comparisons.

You can assess where you live versus other cities and towns in the same state, as well as nationwide. It is a good idea to assess these concepts in the event that you can make your living situation better. Self-employed individuals, typically freelancers who can move around and not be in the same location to help their clients, have the option of moving to a place that offers a better cost of living for their income.

So, assess the cost of living, where you live, and determine if your career could be offering you a better salary.

Tasks for this Exercise

  • Assess the cost of living in your city/town/state.
  • Determine if where you live could be changed for a better budget: can you move your house for a lower mortgage? Buy versus rent to decrease monetary waste? Move to a new state for a better career and cost of living?
  • Career satisfaction and income is important. You don’t want to throw away a job that is providing you with enough income, but if your cost of living is too high versus your salary, a change may need to occur, including a second job.
  • Write out your income, recurring and non-recurring expenses. Add the expenses up and subtract the amount from your net income. Are you in a deficit, is there savings to be made, or are you breaking even?