Join Ken Boyd for an in-depth discussion in this video Reviewing a sample budget, part of Setting Your Financial Goals.
- Have you ever walked a street that you normally drive on? In the day-to-day rush of life we typically zoom down the street without paying close attention to the details. But if you get out and actually go for a walk on the same street, what do you notice? Well, if you're like me, you notice all of the intricate details that you normally would miss. The sidewalk, the trees, the flowers, the different mailboxes, you see all of it. But when you're driving you miss these details because you're focused on something else, driving.
Many people have a similar experience when it comes to paying the bills each month. We have a vague idea of how much cash is coming in the door and the dollar amount of most of our bills. The challenge is we don't start each month with a plan. And if we don't have a plan we miss things. Just like that driver that's zoning out and not aware of what he's passing on the road. We might intend to save and invest, but we don't do it, because there's no plan in place to do it. What you'll see here is a template you can use to create a budget.
Let's take a spin through this document and think about how we can plan a budget to meet a financial goal. First look at Wages, salary. The first step in planning to invest is to consider what investment options are offered through your employer. Many companies offer investment vehicles that allow you to invest with pre-tax dollars. Here's what we mean by pre-tax. Assume your employer owes you $100 and your Tax bracket is 30%, your employer would normally withhold $30 for taxes, 30% of $100, and pay you the remaining $70.
You can then decide to invest the $70 after tax. On the other hand, say your company offers a retirement plan that allows you invest in a pre-tax basis. Instead of taking $70 after tax, you invest the entire $100. The $30 in tax is not taken out, because you decided to invest the dollars through the company investment plan. Here's another thing about investing through your company, your employer may match your retirement contributions up to a certain dollar amount.
Say that you decide to invest that $100, your company matches your retirement contributions up to a maximum amount of $5000 each year. Your company invests an additional $100 on your behalf, you have a total investment of $200. If you're self-employed, you can set up several types of retirement plans. The point here is to consider investing through your work or business first. Another strategy to make sure you invest and save each month is to Pay yourself first, that means that the first thing that goes into your budget is a dollar amount for savings and investing.
Let's assume your Paycheck is $3000 per month. You can take a look at your monthly budget and decide you want to save $100 and invest $200 per month. So you've paid yourself $300 first before paying any other expenses. Now you have to figure out how to use the remaining $2700, $3000 less $300 to pay your bills. Okay, let's talk about that remaining $2700 per month. One way to discipline yourself when it comes to paying your bills is to set up monthly automated debits out of your checking account.
If, for example, your electric bill averages $70 per month, you can have your power company debit your account for that amount each month. If your actual bill is lower than $70, you'll have a credit on your account toward future payments. Take a look at the month budget in the exercise files, try and fill in those numbers for yourself, so you can picture a monthly budget. You might start with an estimate of how much you can pay yourself, subtract that amount from your monthly income and plan to pay your other expenses with the remaining balance.