The first type of budget we identified on the blog is the simple Envelope Budget. For those who find the Envelope Budget too simple, let’s refocus on the Detailed Personal Budget. Please open this sample Excel file since it serves as a guide for the rest of this blog post. The formulas are already populated; you just need to change red items based on your family’s specific circumstances. Each section has items listed in alphabetical order. Below, color references are provided in parentheses after the section title.
One important caveat: this assumes you and your spouse are in “traditional” employment arrangements … not self-employed or a small business owner. Entrepreneurs have added complexity and should have business financial projections that outline expected net income. The tax situation for small business owners is also different and is not contemplated in this sample personal budget.
PART 1 – INCOME (GREY)
Look at all income sources for you and your spouse (e.g. employment, distributions from investment accounts, outside support, etc.) and list each one separately as a line item. The annual column should be populated first. To be conservative, annual bonuses that are variable in nature should be left off the income section. These 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 – REQUIRED EXPENSES (GREEN & BLUE)
You may not have a dollar amount for every line item here; delete any lines that do not apply to your family. This is meant to be a 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. So 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 twelve months rather than a single, annual payment. You will notice from the sample budget that total required expenses represent 33% of gross income. This is healthy; required expenses should not exceed 50% of gross income.
PART 3 – OTHER (GOLD)
Refer to paystubs and prior year tax returns as you customize this information. Health, dental, and vision insurance coverage should be based on the annual elections with your employer. Salary deferral to a company-sponsored plan (i.e. 401k) is highly encouraged due to company match! Although you elect the amount of salary deferral, consider increasing it 1% annually or more if you are far from the 10% salary deferral mark. More pre-tax savings leads to a lower tax bill, so high-income taxpayers are encouraged to maximize these accounts.
If you need help deciphering taxes, turn to a Certified Public Accountant or other tax advisor. Separate from running WorthyNest, I have an established accounting practice called Statera Vitae, and we are available to assist with income tax projections. Please email email@example.com or call 314-397-6817 for more information.
PART 4 – DISCRETIONARY EXPENSES (PURPLE)
Again, you may not have every category filled but this is meant to give you a point of reference. If you tithe, feel free to move Charitable Giving from Discretionary to Required Monthly Expenses. Discretionary does not mean unnecessary; it simply reflects the variability of these expenses. This section leaves plenty of wiggle room for families to prioritize their financial desires. To come up with 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. Since this is formula driven, try to make changes only to column D (monthly), not F (annual). Notice medical is out-of-pocket expenses. Any employer-sponsored insurance coverage is listed in the prior section, “Other.” As a general rule of thumb, please keep total discretionary expenses at or below 30% of gross income. 24% in this example is good.
PART 5 – NET SAVINGS GOAL (ORANGE)
The bottom line! This is what you have remaining after all other categories have been filled. Hopefully, this number is positive. If not, 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. This can be a great conversation starter with your spouse as you jointly prioritize goals.
If the number for Net Outside Savings Goal is positive, great! Your next step? Decide together which non-retirement goal(s) to tackle first or consider increasing your retirement contribution in the "Other" section. Meeting with a comprehensive financial planner at this point can be extremely valuable, as you chart the course to prosperity. Having an independent, objective viewpoint takes emotion out of the equation. Clarity around goals is critical.
If you want me to be part of this process with you, please reach out. Schedule an introductory meeting here.
Deb Meyer, CPA, CFP®
P.S. Comments are allowed in case you have any questions about the budget that would be helpful for all readers to see. Feedback on this detailed budget format is also appreciated!