How to Track Cash Flow with a Detailed Budget
Budgeting is a sign of freedom where you are in the driver’s seat on spending and saving decisions. It’s your guidepost to build wealth as a family.
If budgeting evokes angst and contempt for you, it’s time for a new approach. Go read this article about how to budget without dread and come back when you’ve finished it.
Some of you may have come here from my article on the Envelope Budget. If you’re someone who finds the Envelope Budget too simple, let’s discuss the Detailed Budget instead.
Go to our Resources page and download the appropriate sample budget within the Supplemental Resources section. The highlighted boxes are suggestions on which dollar amount to enter first for a given category.
We are using the Married Template for this illustration, but you can download the Single Template from our Resources page instead.
Let’s break this down further into five parts.
Part 1 – Income
Look at all income sources for you and your spouse (e.g. employment, distributions from investment accounts, outside support, etc.). List each one separately as a line item.
The annual column should be populated first.
To be conservative, annual bonuses should be left off the income section. These fluctuating payments will truly represent a bonus because you can pay down debt or add to savings. Just ensure you withhold taxes from this bonus as you do any other wages.
Part 2 – Fixed (Required) Expenses
You may not have a dollar amount for every line item here, but this is intended to be a good starting point.
Generally speaking, it is helpful to pay large annual expenses monthly so you do not have to think about a big year-end bill around the holidays.
If your mortgage provider offers to escrow real estate tax and home insurance bills, do it. Insurance agencies and private schools typically offer payment plans for a minimal charge to spread out payments over 12 months rather than a single, annual payment. Remember to be cognizant of fees as you evaluate payment options.
Fixed, required expenses should not exceed 50% of gross income.
Part 3 – Discretionary Expenses
Again, you may not have every category filled, but this is meant to give you a point of reference. Feel free to reposition Charitable Giving from Discretionary to Part 2 – Fixed Expenses if you tithe.
Discretionary does not mean unnecessary; it simply reflects the variability of the expense. This third section leaves plenty of wiggle room for your family to prioritize your financial goals.
To determine the monthly amount of discretionary expenses, think about averages. Vacation certainly won’t cost $300 every month for 12 months, so consider an annual vacation budget and divide by 12.
Notice medical is out-of-pocket expenses. Any employer-sponsored insurance coverage is listed in the following section, Part 4, under Payroll Deductions.
Aim to have discretionary expenses at or below 30% of gross income.
Part 4 – Other / Annual
Refer to paystubs and prior year tax returns to customize this information.
Health, dental, and vision insurance coverage should be based on elections you make through your employer. Salary deferral to a company-sponsored plan such as a 401(k) or 403(b) plan is highly recommended. You may even qualify for an employer match.
More pre-tax savings leads to a lower tax bill, so high-income taxpayers may benefit now from maximizing their retirement contributions. Roth IRA – if you’re eligible — or Roth 401(k) contributions are helpful if you are in a lower income tax bracket now than you intend to be in the future.
Part 5 – Surplus, Or Net Savings Goal
Your bottom line resides in Section 5. This is the amount you have remaining after all other categories have been filled. If there is a surplus, great!
Your next step is to decide together which non-retirement goal(s) to tackle first. Or you could consider increasing your retirement contribution in Part 4, Payroll Deductions section.
If you find yourself with a shortfall, revisit the other sections for errors and see if you are above the suggested percentage guidelines in the required or discretionary expense sections.
Do not be discouraged; this is a starting point and can serve as an excellent conversation starter with your spouse as you jointly prioritize goals.
The methodology is similar for single people. You are trying to aim for the same percentages in each category: no more than 50% fixed expense and 30% discretionary expense.
Extra cash flow is wonderful because you are doing a great job living within your means. A deficit, or negative value, in part 5 means you need to make some lifestyle adjustments. Find creative ways to earn more income or decrease expenses.
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