Monday, November 27, 2006

Calculator gives you the basics for creating a budget

The thought of creating a family budget stops many people dead in their tracks. They look at the stack of bills and receipts on their desk, and suddenly cleaning out the garage is more appealing.

Often the reason is because folks don't know where or how to begin. But when it comes to setting up a budget, you don't have to recreate the wheel--there are any number of tools out there to get you started.

Take the "Ideal Budget" calculator on, part of its Money 101 series on the basics of personal finances. The "Ideal Budget" doesn't quite live up to its name in my book, but it's a quick and easy way to give you the basic framework for your own budget.

A broad financial picture
With the Ideal Budget calculator, you first input the amount of your income. Then you enter your expenses, in five broad categories: Housing & Debt, Taxes, Insurance, Savings and Investment, and Living Expenses. The calculator shows the percentage of your income going to each specific category, and provides an "ideal" budget allocation to see if you're spending too much or too little in one area.

It took me all of about 10 minutes to enter my family's information, though admittedly I have most of that information available at my fingertips. If you don't keep track of your expenses regularly or can't remember what you did with your last paystub, it will take you a bit longer.

I liked the fact that the budget was organized into just five expense categories. If you're just starting out making your first budget, simplicity is key. You need to have enough categories to make the personal financial "data" you're gathering and tracking helpful, but not so many that it's an administrative headache.

Not perfect categories
But I question a couple of the specific categories the Ideal Budget uses. For instance, I don't see a whole lot of value in budgeting your taxes. True, taxes are a big expense, but they are what they are. Most people with a steady paycheck or mortgage payment pay the same amount each month. If you're overspending in one category, you wouldn't be reducing your taxes to make up the difference. M and I base our monthly spending plan on after-tax income, which is truer to the actual income we have to spend.

I also don't like grouping Housing & Debt together. Yes, your home mortgage (if you have one) is debt, but it's also an investment--much different than the credit card balance you have for that plasma screen TV, or your new car loan. It's much more revealing to give your consumer (i.e., non-mortgage) debt its own place in your budget, and see just how much of your monthly income it's consuming.

Percentages can be questionable, too
The "Ideal budget allocation" percentages provided with the calculator are helpful. Some of the most common questions folks have about their finances are, "How much should I be spending per month on my house? On groceries? On entertainment? etc.," and the calculator gives a basic idea.

But like the categories themselves, the percentages come with some caveats. The calculator lists 25% as the ideal amount that should go for taxes, an amount which realistically could vary by the individual. It lists just 26% of income going for living expenses, but includes everything from food and clothing to gasoline and utilities. I don't know where the folks from CNNMoney live, but in New Jersey, the cost of living is probably higher than 26 cents of every dollar.

One "Ideal budget allocation" I agree with: 15% for Savings and Investment. That's truly an ideal figure, based on the fact that the U.S. savings rate has been negative for the past year, but one well worth striving for.

A first step worth taking
Judging by the "Ideal Budget," my family's in pretty good shape. We have little debt, so we're well below the 30% ideal allocation in that category. Our living expenses are running about more than a third of our income, which makes me question the cost of my 105-mile roundtrip daily commute--but since I love where I work and where I live, that's probably not changing.

If you've never created a budget before, the Ideal Budget calculator is worth a try. At least you'll get to say, "So that's what a budget looks like...!" But keep its limitations in perspective and think about how you could tailor it to your own needs. Hopefully, it will encourage you to put off cleaning the garage for another week.

1 comment:

Anonymous said...

What % of your income do you think you pay in taxes- counting them all-FIT, NJIT, SS, medicare, sales property, gasoline , misc?