Budgeting Basics Part III: Entering goals and incorporating other sources of revenue
This is the third in a four-part series. In this week's budgeting lesson we learn how to incorporate your personal goals into the budget of your everyday income and expenses.
Enter Your goals
Now that you've entered the current income and expense items that you encounter in your everyday life, it's time to work your goals into your budget. Look back at your list of goals and determine how much you need to start setting aside to attain them.
You may discover that you currently don't have enough income to cover all the goals you want to achieve. This isn't unusual. It's easy to wish for things that are currently out of reach. That doesn't mean you won't ever achieve those goals - it just means that you need to take some different steps in your financial planning if you want those things.
Examine your expenses carefully to determine where you can make cuts. For example, if you really want to be able set aside $200 per month toward your retirement fund, you may need to cut back on your expenses for dining out, transportation, or something else that is less important.
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Consider incorporating some cost-cutting measures into your daily finances. Also, as a family, consider things you can do to reduce expenses. When you are working together to achieve financial goals that you all agree are important, there is much more incentive to cut costs in order to enjoy the lifestyle you want in the long run.
Better still, start thinking about how you can increase your income. It's often easier, and a lot more fun, to earn additional money than it is to cut back on the things you like to purchase. Alternatives include looking for a job that pays more, taking a second job, and going back to school to improve your skills so you can qualify for promotions or other types of work. If you need more money to meet your financial goals, then it's up to you to figure out how you are either going to make more income or revise your goals so that they are in line with your earning capability.
If you have children of working age, make sure they know what you expect of them in terms of contributions to the family budget. Perhaps they are expected to earn their own gas money or pay for movies and other entertainment. Older children may be expected to contribute to the household budget. Children are more receptive to participation in the family budget if they are aware of how other household expenses are being met. If a child knows his contributions to certain expenses enable his parents to pay for his college education or a family vacation he is more likely to want to assume some of the financial responsibility in the family.
College students need to have a clear understanding of what their parents intend to pay for in the way of college expenses and what the child is expected to pay for. If the child is to receive an allowance, the child needs to know exactly what the parents expect that allowance to cover. By setting expectations in advance, disagreements and arguments can be avoided later.
When analyzing your budget's performance, keep notes on what goals are currently out of reach based on your current income and expenses. You need to work on developing a plan to incorporate these goals into your budget in future years. Each year you can reassess your budget and adjust the amounts to accommodate the changes in your finances.
Incorporate other money into your budget
You still haven't adjusted your budget for the use of borrowed money, money from your emergency fund, or money you acquire from liquidating assets. Money from these sources is an important part of your budget. Just as important is paying for the money you borrow.
When you receive money that isn't part of your regular source of income, don't just drop the entire amount into your budget as income in the month you receive the money. Instead, filter the money out on a monthly basis, showing how much you intend to withdraw from your emergency fund or other accounts as a separate line in the income part of your budget.
If you borrow money, either as a line of credit, an equity loan against your house, money from parents, or money from some other source, you need to incorporate a payback schedule into the expenses part of your budget. You will also need to factor in the interest you are required pay on the loan. If you use money from your emergency fund, show the amount you plan to take out of the fund in the income section of your monthly budget, but at the same time think of a plan for putting the money back in the fund.
These payback amounts may not begin in the same month in which you withdraw or borrow the money, but you still need a plan for paying back the money. This pay-back plan can be added to your medium-range or long-range goals and worked into your budget over time. If you borrow against your house, your mortgage payment will be adjusted immediately to incorporate the additional amount you borrowed.
Budgeting for taxes
Taxes is a complicated area of your budget that you shouldn't overlook. Many of the items in your budget will affect your taxes. You should at least have a passing knowledge of taxes so that you can incorporate these them into your expenses.
If you record income on your budget at your gross amount of pay, don't forget that taxes will be withheld from that income. If you don't know the exact amount of taxes that will be withheld, reduce your income by an estimate of federal and state income taxes based on the tax rate you paid in the previous year. Also reduce your income by Social Security tax and Medicare tax (7.65% of your gross income), and any other amounts you anticipate having withheld from your pay.
If you have income from interest or dividends paid on investments, or if you sell stocks or shares in mutual funds, there will be tax on those amounts as well. Figure on paying 15% federal income tax on the profit you make selling stocks or shares in mutual funds, and add to that percent your state income tax rate. Estimate federal income tax on interest and dividends based on your tax rate from last year. Don't forget to estimate state income tax on these items as well, using the rate applicable for your state.
Some of the expenses you include in your budget have an effect on your income taxes as well. If you refinanced your home, the interest on your mortgage payment will increase and that additional amount will add to your tax deductions. If you are paying off college loans or paying college tuition costs you may be eligible for tax deductions or credits for at least some of these amounts.
If you add to your family by having a child, you can take a personal exemption on your tax returns. You may also qualify for an additional exemption if you begin caring for a relative in your home.
By Gail Perry, CPA - AccountingWEB Managing Editor
Next week: Budgeting Basics Part IV: Incorporating tax benefits into your budget and Using Your Budget
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