It's important to plan for how you'll allocate your financial resources for each month of the year. This process, commonly known as a budget or spending plan, won't take long to develop but will pay great rewards throughout the year.
Here are the steps and a few recommendations for a livable family budget.
Determine Your Income
Start by determining your net spendable income (NSI). This is what you have to spend after giving and taxes.
1. Calculate all sources of known income for the year: salary, bonuses, investment income, Social Security, and so on to determine your total income for the year.
2. Determine the percentage of your gross income that you intend to give during the year. My recommendation is to use 10 percent or a tithe to honor God first. In 2012, the average charitable giving of all American households was 3.7 percent. I believe that Christians should have reason to be far more generous than the non-believer.
3. Calculate the amount you'll likely owe the federal government in taxes. You can determine this amount from prior year income tax returns.
4. Subtract these two numbers from your gross income, you'll have your NSI. This is the amount you should allocate to cover your monthly or annual expenses.
Tiered Allocations
The next step is to allocate money for the largest sources of expenses to the lowest, so let's begin with housing.
HousingYour total housing expense should be no greater than 30 percent of your net spendable income. If your NSI is $45,500 that would equal $13,650 for rent or mort- gage, as well as insurance, maintenance and utilities.
According to the Consumer Expenditure Survey, 32.8 percent of post-tax income in 2012 went to housing. Clearly, our livable budget amount is much less. This is the number one area where most people make a mistake. They buy or rent more housing than they can comfortably afford. It's better to down- size than to be "house poor."
Autos and TransportationAllocate how much you'll spend on your auto or transportation costs. We recommend no more than 11 percent of your NSI. In 2012, the average American spent 17.5 percent of their gross income on this category. Again, we recommend that you should be more conservative. Driving a car that's paid in full will greatly reduce your transportation expenses.
FoodFood is the next largest category that should be carefully accounted for in your budget. In 2012, Americans spent 12.8 percent of their total income on food, which includes groceries and dining out. We recommend a total of 11 percent of your NSI.
HealthcareThe next biggest category is likely to be healthcare. The average American spent 6.9 percent of their income in 2012 on health-related costs such as insurance and medical bills. By combining insurance and out-of-pocket costs for medical and dental visits, we recommend this category be allocated as 9 percent of your NSI.
MiscellaneousThis completes most of the big items in your budget. However, there are many other categories to include, such as expenses for mobile phones and Internet services as well as the costs associated with pet ownership, both of which happen to average about $1,000 each year for the American household.
Include categories for savings and investing. If you're carrying debt from student loans, car payments or credit cards, add a category in your budget for eliminating all consumer debt by paying these down each month.
Additional HelpThough a budget will help, many people often need help building a budget. Here are three recommendations:
1. Download free budget forms from Crown Financial Ministries. Many like to "do it yourself," so these forms will make building a budget much quicker.
2. Order "Creating a Spending Plan" from Crown's E-Learning site. This tool provides you step-by-step instruction on how to start and live on a spending plan. You can order the plan at crownportal.crown.org.
3. Contact a MoneyLife Mentor to have a compassionate, trained guide assist you through the process of building a budget and achieving your financial goals. Learn more at mentoring.crown.org.
This article is courtesy of HomeLife magazine.