Budgets can take on many forms but they all contain the same three basic components – income, expenses and an ending balance.
The income section represents all sources of money. A recent graduate may have employment earning as well as spouse’s income. A practice owner may additionally have dividends (earnings) from practice ownership or other investments and a student may include student loan living expenses, grants, scholarships or monetary gifts from family members.
Gross vs. Net
Gross income is the total amount of your salary before any taxes or benefits have been taken out. Net income is the amount of money you take home in each paycheck after those taxes or benefits have been removed. When recording income, make sure to use the net amount.
The expenses section lists all outgoing money. Some people choose to use only broad expense categories such as housing, utilities, auto, and food, while others prefer to get more specific, breaking each of those categories down into subcategories. For example, auto may be broken down into the following subcategories: car payment, gas, registration, insurance, maintenance, and parking.The more specific you get, the easier it is to manage expenses. Highly variable expenses, such as food, entertainment or personal expenses should be monitored through subcategories. Expenses that do not vary much or that you don’t have much control over variations such as mortgage payments, property taxes and home owners insurance can be grouped together to save time.
The balance is simply the amount left over at the end of each week, month or year. Many budgeting software programs allow balances to roll over into the following month. This feature is helpful when managing expenses that don’t occur on a monthly basis such as home or auto repairs.
Establishing a Baseline
Building a budget can be a challenge, especially when it’s the first time you’ve ever had one or you are transitioning to a new location. Where do you start if you have not established a baseline on variable expenses such as food, gas or utilities? Luckily there are a few tools available to aid in this process.
Accounting software programs such as Mint, Quicken or QuickBooks automatically import checking account, debit card and credit card transactions, allowing you to easily see exactly where you spend your money. Monitoring each category for a month or two will give you a pretty good idea of how much your current standard of living costs. Categories with a large degree of seasonal variability, like utilities, may take bit longer to obtain an accurate estimate but monitoring them for a couple of months will give you a place to start. The local power company may be able to provide you with some seasonal ranges as well. The more you use these programs, the better your database becomes!
Cost of Living Estimators
If you already have a budget, a cost of living estimator can help you adjust your current budget to fit a new location. Each calculator is a little different but they all work in a similar way. Simply enter the city you are in, the city you are moving to and your current salary. Depending on the calculator used, you will receive data on the differences in housing prices, groceries, gas, and a variety of personal expenses. The differences may be reported as mean prices, price ranges or percent change. Use this new information to increase or decrease the amount allocated to each expense category.
Budget Management Systems
The most difficult part of establishing a personal budget is managing it! To alleviate potential headaches, start owning your finances sooner rather than later. It’s much easier to manage them when life is simple. As soon as personal finances get complicated, setting up financial management software becomes a lot more time consuming and confusing. However, if you grow together, much of that stress or frustration can be avoided.
Choosing a Budget Management System
There are several different programs available to help you easily manage your finances. Some programs are only for budget management while others will allow for more complex growth like business ownership, investment tracking or retirement planning. Start by asking yourself where you would like to grow your finances.Monitoring a Budget | All programs will allow you to build a budget, categorize expenses and track your progress monthly. Maximizing Tax Refunds | Many programs easily import expense data into tax preparation software programs (TurboTax) or as a report that can be given to a CPA. Most of these programs can also store receipts, putting all of the information you need to maximize your tax refund right at your fingertips. Insuring Personal Property | The ability to produce a balance sheet or track assets allows you to easily value items in your home. This information is usually required by insurance companies to ensure coverage in the event of theft or damage. Purchasing a Home or Practice | Most banks require personal financial documents such as five years of income statements and balance sheets before they are willing to lend money. Additional Features | Some programs allow you to import and track investments or retirement funds.
A Few Programs to Investigate
Mint | This is a free budget management program by Intuit. It allows you to categorize expenses and monitor your budget from a computer, phone or tablet. There are basic features for investment tracking and retirement planning but report generation is minimal. Quicken | Quicken is the next level in personal financial management. It provides the same basic features as Mint but includes advanced options for expense, asset, liability (debt), investment or retirement tracking. Data can be exported to tax preparation software and custom reports can generate an income statement or balance sheet. Quicken Basic costs about $40.Quickbooks | Quickbooks is a subscription accounting software service. It is a bit more complex than Quicken or Mint but offers several advanced features. It is a popular choice for small business financial management and can be found in many veterinary hospitals. Subscriptions start at about $15 per month.
Type in your bank or credit card company and follow the instructions on the screen. Repeat this for each account.
Once you have finished linking your accounts, visit the accounts home screen to see a brief summary of each account.
Linking Loans, Investments and Property
Next add any loans, investments or property. From the account home screen, click Link Loan or Mortgage, Link Investment or Add a House or Car and follow the instructions to automatically track each account. Once you have finished linking all accounts, you will see a net worth at the bottom of the accounts home screen.Simply put, net worth is defined by the equation:What You Have – What You Owe = Net WorthIf you chose to include student loans, this number might look pretty bleak. That is because we are not able to add the value of our DVM degree to the asset or “What You Have” side of the equation. We are only recording the liability or “What You Owe” portion. Luckily, most banks understand that in order for a veterinarian to practice medicine, they had to pay for an expensive degree. As long as student debt is well managed, it usually doesn’t get in the way of home or practice ownership.
Selecting and Creating Budget Categories
Now its time to start building your budget. Select CREATE A BUDGET
Choose a category such as Auto Payment.
If you do not see the category or subcategory you would like, select add a category and follow the instructions to personalize your budget.
Returning to the category management screen, select the frequency this expense will occur (every month, every few months, once per year). If this is a category where you would like the balance to roll-over select start each month with the previous month’s leftover amount. Then enter the amount you expect to pay monthly, every few months or once per year. Repeat these steps for all expense items and income sources in your budget.
Monitoring Your New Budget
Each transaction will need to be sorted so that it matches the categories in your budget. This is a bit tedious at first. It doesn’t stay that way for long. Each time you categorize a transaction, Mint gets “smarter”. This means the next time Mint sees a vendor (store) you categorized, it will automatically categorize the transaction to match the previous ones.