Creating Your Own Mutual Fund

Just a couple of minutes ago I had just finished paying my bills for the month. I was able to do this because I had set up a plan some time back. We were able to create this plan through months of keeping track of our income and our expenses. With this plan we are able to predict what the following month’s income will be and the respective expenses. This is what a Budget is. It is a plan developed to make the most out of your money and to know where it is going.

Now no two budgets will be the same. For each family there will be differences. Even for the same family a budget will change as the needs and resources of that family change. You can set up a budget with a specific goal in mind such as buying a house, getting married, going on a once in a lifetime adventure, going to school, or even to start a business. The possibilities are endless. As time goes on those budgets will become obsolete as you achieve your intended goal or others come up. In short, a budget is a living, breathing document and most of all, it is not written in stone. It is a plan, a guide which will need monitoring and adjusting as life goes on and you encounter those little things which make life interesting. There are also many different ways of creating a budget but for the sake of simplicity I will just go over a very basic plan. As you develop your own and gain ever more experience you will develop your own style that works best for you. I actually use one which is more of a blend between a budget and a Cash Flow Statement, but let’s keep it simple.

Let’s get started. For this lesson I will be using a budget for just living the year. Again, as you gain experience and learn you will be making budgets to fit all sorts of situations and goals. But I will be using just a simple budget for a family’s month to month living. When I create a budget I break it into three main parts; Income, Fixed Expenses, and Variable Expenses. Let’s take a moment to go over each of these.

Income may seem to be self explanatory and for the most part it is. However when you consider what could be considered income and how you would like to keep track of your taxes it could become a bit murky. For example if you derive your income from a business do you count your total revenue as income and then subtract the Cost of Goods Sold and Expenses from Continuing Operations of the Business from your revenue before you classify it as income? Do you count just Taxable Income or do you count other things such as taking care of the property for your landlord which is then subtracted or discounted from your rent? Do you run a business and receive payment in the form of a draw? Do you use Gross Income and then expense out the taxes and other deductions such as for retirement plans or do you just use your Net Income? Do you count Bonuses? Are you strictly Commission or is a portion of your income derived by Tips?

Now, you may ask, "why do I need to create a budget such as this when there are numerous budget applications and programs that are available?" Even with the latest budgeting programs you still have to figure out what you would like to keep track of and you will still need to set it up. Even with the best budgeting programs you will need to adjust it as you continue to keep track of your finances and goals change.

In this example we will just be using Gross Income. This means we will be keeping track of the taxes and other deductions. This part is incredibly easy if you are salaried. For the most part of the year your entry into each month’s budget will be the same. Of course when you have a raise or promotion this will change. Most of us are on an hourly or some form of piece count wage. This example will be based on an hourly wage.

I would look at my schedule to get the hours I will be working. Let’s say they are a standard 40 hour week. I don’t have any time request off so it should be a 40 hour week for each week of the month. I earn $15 an hour and do earn a quarterly bonus. My spouse works 40 hours as well but earns $5 an hour plus commissions. So, for a four week month I can expect to bring in $2,400 and my spouse can be expected to bring in at least $800. If you noticed I did not count any bonuses or commissions. When you deal with returns or cancelled sales as well as other factors beyond your control commissions can fluctuate wildly. As I mentioned about the bonuses they are only quarterly and unless this is a bonus month I will have over estimated my income. I have found it is easier to plan what you know is for sure. So for our income I am counting on $3,200. So, on my projected or trial budget which would be called a Pro Forma the entry for income would be as follows:

Current Month’s Budget

Income

Mine 2,400

Bonuses 0

Spouse’s 800

Commission 0

Taxes & Other Deductions 800

Net Income 2,400

If you noticed even though I did not estimate my spouse’s commission I have created a spot for it on my Pro Forma Budget. I will still be keeping track of it. Again, you can make it as detailed or not as much as you want. I will say that in my opinion it is always better to estimate the lowest amount for income when planning. It helps to create room for room for error. At the end of the month the results for our budget are as follows:

Account Budgeted Actual

Income

Mine 2,400 2,610

Bonuses 0 0

Spouse’s 800 720

Commission 0 1,400

Taxes & Other Deductions 800 1,182

Net Income 2,400 3,548

At the end of the month we see that we had actually made $1,148 more than projected. Having created a budget which just dealt with base incomes we gave ourselves a flexibility of $1,148. This is just something I like to do with my budgeting. You may like to project your entire income.

I like to start the Expense part of my budget with Fixed Expenses. These are expenses which remain the same month after month such as your Mortgage and Car Payments. This section could also include your goals such as wanting to save $100 a month. Pretty much any payments you make which are the same each month you could include as a Fixed Expense. Some of these expenses may change each year but are the same each month such as cable increasing its fees. You will need to make adjustments accordingly. When I budget expenses I like to round up to the nearest tenth. For example: let’s say my car payment is $342.51 a month. I will round it up to $350. This again will allow room for error. Income I will round down while expenses I will always round up.

For the budget my fixed expenses may look like this:

Accounts Budget

Mortgage 1,000

Car Payment 350

Cable 50

Savings 100

Insurance 100

Our Fixed Expenses add up to $1,600 which leaves us with $2,400-$1,600=$800. From this amount we will plan our Variable Expenses. These are the expenses which change each month such as utility bills, car maintenance and fuel expenses, groceries, and entertainment.

Whereas Fixed Expenses are easy to predict and you will know right away what to plan on in your budget Variable Expenses will take some tracking and experience to decide on what to plan for in your budget. Chances are that for the last few years you have not actually kept track of these expenses. These are usually the ones which get away from us. This could create a problem when creating a budget especially for the first time. Biggest problem when creating your first budget is what do you put down for projected expenses?

If you have used your bank or debit card for the majority of your purchases you can review your bank statements and get a good idea of what you have been spending and on what. If you haven’t then my best advice is to make a good guess. You should have an idea of what you have spent. For example let’s say that you look at your latest grocery bill and see that you spent $97.82 and you go to the store two to three times a month. You could put down $250 for groceries on your first budgeting attempt. At the end of your first month budgeting you find that you actually spent $276.29. You can then adjust your projection for the following month to $280 or even keep it at $250 and see if you can do a better job in your purchases and try to hit that target. Why would you do this? Simply because when you change your budget for one account up the change will have to come out of the other accounts. With $800 leftover after the Fixed Expenses $250 leaves you $550 for your other expenses and if you increase your grocery projection each month to $280 that only leaves $520 for the rest of your accounts.

You will need to do this with your other variable expenses and make the best prediction you can with the information you have. If you fill up your car’s gas tank once a week and your bill is usually $35 you could budget $140 in your first attempt. In the end you may have something which looks like this:

Account Budget Amount

Grocery 250

Gasoline 140

Electric 90

Water 70

Entertainment 50

Health 50

Household 50

Miscellaneous 100

Another thing you will have to decide is what accounts you will be creating and what exactly fits in which account. You may buy soap and toilet paper while grocery shopping as well as laundry detergent but you may want to put the toilet paper and soap under Health while the detergent goes under household. Or you could just decide on keeping it all under grocery because of where you bought it. It is your budget and it is up to you to decide exactly how much detail you want. However, to avoid errors such as double entries or distorted information how ever you decide to track a purchase you should keep tracking it as such.

Okay, a month goes on and you kept a far better tracking of your expenses than you have ever done before and your end results for your variable expenses are as follows:

Account Budgeted Amount Actual

Grocery 250 176

Gasoline 140 143

Electric 90 55

Water 70 0

Entertainment 50 23

Health 50 62

Household 50 35

Miscellaneous 100 46

Car Repair 0 250

As you might have noticed there were some surprises. Some of your initial estimates were a bit off and you didn’t pay a water bill this month. You also had a big surprise in the form of car problems. From this information you could adjust your budget as you see fit. You may decide to just keep it the same for the following month and gather more information to make far better decisions in the future. Or you could adjust the amounts to what you did in the previous month.

Here brings up an excellent point. As the months go by your spending will change for each account as seasonal needs change and the unexpected come up. You will actually be able to base your budgeting on monthly averages which is what I do. For example the Water Bill only comes once a quarter so the $70 we based our budget on was based on our last bill. This comes to $280 a year and divide this by the 12 months will give us about $23.33 a month average monthly expense which we round up to $30. We budget this each month and actually set the money aside that when the Water Bill actually comes we have the money for it.

You can do this with all of your Variable Expenses. The Car Repair may have been the only one you have all year but you may have incurred registration and inspection fees and decided to include this with a Car Repair/Expense Account. Your annual expenses for the car including parking, insurance adds up to almost $750 for the year so you divide that by 12 months and decide to start budgeting or setting aside $70 a month which will be readily available as all those expenses appear. Your Electric bill will fluctuate throughout the year as lighting and other needs change with the seasons. Again you can take the annual total and divide it by 12 and set aside that money each month so that when the more expensive months appear you have the money to cover it.

This has been just a very simple demonstration of a budget to give you an idea of how to create one which suits you and your financial goals. They are guides and are not written in stone. They will need to be updated and adjusted according to the information you gather and your ever changing needs. After some practice and especially with a lot of the programs which are available for computers you will find it actually takes little of your time but is well worth it as you learn where your money is going and discover ways you can save and improve your situation.