Simply Junior

What Is a Budget?

The purpose of a budget is to give you control of your own money. With a budget, you actively decide what will be spent, and where your money can best be put to good use. There is nothing like the good feeling you get when you are in control of your money, rather than your activities and expenses controlling you.

What Is a Budget Plan?

A budget plan is a plan where you formally draw up a plan for expenditures for a given period of time, usually one year. The budget process includes all income sources and how that income will be allocated to expense categories. The biggest problem or hurdle with budget planning is to stick with it. Most families do not plan to fail, they fail to plan. A good plan will provide an excellent road map for success. A budget is just a tool and periodically, it needs to be fine tuned.

What Are Income Sources?

Do you know where your income is coming from and how much it is? Do you know what should be included as income? Here is a guideline regarding what should be included as income.

Wages. This is your net pay from all paychecks. How do you get paid: weekly, bi-weekly (every two weeks), bi-monthly (twice a month) or monthly. Retirement income. Interest and investment income. Do not include this unless it is consistently the same yearly. Alimony. Do not include this unless you consistently receive it and there is no reason to believe you won’t. Bonuses, a raise or overtime pay from your employer. Do not include these since they could be discontinued at anytime. Tips. Do not include this unless you can average the amount based on what you received in prior years.

What Are Expenses?

Expenses include everything you spend. Do you know how much you are spending for categories such housing, transportation, food, clothing, entertainment, child care, medical expenses, charity and debt? Are you overspending for non essentials and thus not able to meet your necessary obligations?

Based on US News and World Report for budget allocations, the following is a guideline for how budget expenses should be allocated:

35% Housing - Includes: mortgage or rent, utilities, insurance, taxes and home maintenance. 20% Transportation - Includes: car payments, auto insurance, tag & license fees, maintenance, gasoline, tolls and parking. 28% Other - Includes: food (12), clothing (3), entertainment (5), child care, medical expenses (5) and charity (3). 15% Debt - Includes: student loans, retail installment contracts, credit cards, personal loans, tax debts, medical debts and alimony payments. 2% Savings - You should plan to save this amount throughout your working years, with a goal to increase it to 10%.

How does your spending compare to the guideline? Or is it impossible to determine because you have no idea where your money is going and how to even categorize it?

Here is a list that will help you categorize your expenses.

Fixed ExpensesThese are expenses you have little control over.

Utilities: Phone, disposal, water, electricity, gas heat, sewer

Home: Mortgage (usually includes insurance and property taxes) if not, insurance and property taxes

Health: Dental, health, life, and eye insurance (these items are usually covered by payroll deduction) if not, than add them here.

Income Taxes: Include Federal, state, local and FICA taxes only if you are self-employed.

Additional Outstanding Debt: student loans, retail installment contracts, credit cards, personal loans, medical debts and alimony payments.

Non-fixed Expenses

These are expenses you have more control over.

Food: Groceries, lunch, eating out, snacks, and date night.

Child support: Day care, babysitting and alimony payments (if it applies to you).

Transportation: Gasoline, maintenance, repairs, tolls, taxis, subway, fees and insurance premiums for all vehicles.

Debt Payments: Credit cards, Student loans, other loans.

Entertainment: Cable TV, Computer expense, software, hobbies, dues, subscriptions, videos, movies & admission fees, amusement parks, and vacations.

Clothing: Children and parents.

School: Books, supplies, fees and gym expenses.

Pet Expenses: Food, Grooming, board, Vet shots (if this applies to you).

Miscellaneous Items: Toiletries, household products, gifts, church, other donations, grooming (haircuts, make-up etc.) birthday and anniversary cards, children’s allowance, spouse expense money (amount for each spouse to be spent by them for any reason without explanation) and insurance premiums (not covered by payroll deduction).

Savings: Emergency fund, savings for retirement or children’s college fund and vacation fund.

If you are still unable to determine how you are spending your income, keep track of your expenses for a couple of months or until you can more accurately list your expenses.

Create Your Budget Plan

You are ready to create your monthly budget plan. Using budget software or a Microsoft Excel spreadsheet will aid the process. The budget plan will be divided into monthly buckets. Take your total planned income for the year and divide it by 12. Take your planned categorized expenses based on prior actual expenses and divide the categorized expenses by 12. Enter your total income in monthly columns; then enter your total expenses in monthly columns. Compare planned monthly income with planned monthly expenses. The total monthly expenses must not exceed the total monthly income amounts. If expenses exceed income, planned expenses must be decreased. A good budget plan should show planned expenses less than or equal to planned income.

Share Plan with Family

Sit down with the entire family and provide them copies of the proposed family budget plan. If your children are under the age of 5, do not include them unless they are receiving an allowance. Go over all the details of the plan. Provide information on what will be done with raises, bonuses, and overtime income if received during the year.

Tell the family that this is a plan and is not cast in stone. Indicate that adjustments may be made during the year. Answer all questions. Get each family members buy in. Then, STICK WITH YOUR PLAN. If any major situation should come up, hold another family conference and explain to them the situation.

If you are single, make a commitment to STICK WITH YOUR PLAN. Make adjustments as needed.

What To Do With Amounts in Budget Plan Not Spent For a Given Month?

This is a real good question. As your budget plan is followed throughout the year, there will be months in which you will not spend a planned expense. When this occurs, do not spend this money on something for which it was not designated. Most families have a tendency to spend the money on some other item. To prevent this from happening, keep the unspent planned expense amount in a savings account. When the need for paying the planned expense occurs, the money will be available to transfer from savings into the checking account.

Conclusion

If you follow the process above you will begin to take control of your expenses and have a road map for greater success. As you continue the process year after year, you will see new spending control trends. You will become successful in controlling your spending. Remember, most people do not plan to fail, they just fail to plan.

We pay taxes, based on income each and every working years of our lives, but according to Uncle Sam that’s not enough, so we pay taxes on death too. As far as taxes go, the estate tax has always been one of the least accepted forms of taxation. It is a serious revenue generator for the coffers of the US government. There has been much talk in recent years about the repeal of the death tax, in order to do so we will have to find revenue for another tax source to replace estate taxes. This is easier said than done, so we wait. And we may be waiting for a long time, as there doesn’t seem to be a clear solution.

Estate taxes are often referred to as the double tax, as it is a second tax. Essentially the this tax is a form of double taxation, since it’s taxing money that really has already been taxed. Though it may not seem fair, it’s currently the way it is. The good news is that there are ways to avoid these taxes, regardless of your tax rate. For the rich, the estate tax is not just referred to as the double tax, but rather the volunteer tax. For these individuals who might be classified in the highest tax rate, are often well aware, when it comes to avoiding the estate tax.

All too often, it’s the middle class who aren’t well-versed in estate planning, and that end up footing the bill. This is common for even those that may be in a lower tax rate. All they need is a little bit of knowledge, and they too can eliminate or lower their taxes. To touch on a few of the techniques that the ultra rich utilize to avoid the death taxation, they often use rather mundane estate planning practices. This process doesn’t have to be a complicated one. The simplest step to reducing your taxable estate is gifting. You can eliminate large amounts of your estate by simply gifting. Current law allows for a rather large amount of money to be gifted, per individual. So, by gifting to family or predetermined beneficiary such as a charity you can start reducing your estate. And the beauty of gifting is that there is no limit on how many individuals you can give to. Why wait till you die to tax your estate when you can gift it to the same beneficiaries free from the taxation of your estate.

The other popular method to reduce estate taxation is life insurance planning. Life insurance policies are utilized by the rich to find any reduction in an estates bill that may be incurred by future generations. Life insurance can provide a large amount of leverage with a rather small initial outlay. A large estate, with potentially large tax consequences can be covered with a rather small life insurance premium. And because life insurance proceeds are not taxable, the life insurance payout is completely free of tax, when set up properly. This is why life insurance has been an integral part of estate planning for years. In fact, life insurance planning is worth taking a closer look at for your estate planning needs. This is not just exclusive to avoiding the estate levy. The synergistic effect, along with the tax advantage of life insurance, makes it an excellent tool for the transfer of wealth.