# Create a useful financial tool in eight easy stages

You don’t need to be an accountant or a financial wizard to create a simple budget for yourself or your household. If you are comfortable with using basic spreadsheet software on a computer, that’s fine. Alternatively you may prefer to use plain old pencil and paper with a calculator. (Don’t use a pen: you will be erasing and changing figures.) The principle is exactly the same whichever method you choose, and only a few simple steps are required.

Either way, you will end up with a useful tool which will tell you what your net income is going to be for the next twelve months, how that income is going to be spent, and whether there will be anything left over. This is the key to financial control on a personal or household level, and the eight steps are very easy to follow.

## Step One – Set up a blank spreadsheet

Either set up a spreadsheet on a computer, or use columns and rows on a sheet of paper. Create fourteen columns. Head up columns two to thirteen with the names of the months for the next twelve months. Column number fourteen is the total column. Put the heading ‘Income’ in the first column, but on the second row.

(From now on, terms like ‘write,’ ‘add’ and subtract’ will be used, but if you are using a spreadsheet, you will obviously be typing in a formula.)

## Step Two – Work out your monthly income

If you get a monthly pay check you can simply use the net pay figure (the amount you actually receive after deductions for tax, retirement fund, health care etc.) as your monthly income. If you get paid weekly you need to multiply this amount by 52 and divide by 12. If you get paid every second week you need to multiply by 26 and divide by 12.

In the first column, underneath the heading ‘Income,’ write a description of each source of income. (This could be simply the name of the company or companies you work for.) Then write down the net amount you expect to receive from each source, each month. Ignore cents.

Write the words ‘Total Income’ in the first column, underneath your list of income sources. Now add up the income amounts in each column, and write the total for each month in your ‘Total Income’ row.

## Step Three – Work out your unavoidable expenses

Leave a blank row under your ‘Total Income’ row, and enter a new heading in the first column: ‘Unavoidable Expenses.’ Then list the major costs of living that you really can’t manage without, such as rent or mortgage, food, transport, electricity, heating and basic clothing.

Include any regular loan repayments. If you have a credit card debt that you are paying off, include the current minimum monthly repayment under your unavoidable expenses. When your budget is finished you are aiming to have a surplus that you can use to start reducing your debt.

If you are using public transportation, multiply the cost of your journey by the number of journeys you make per month, or put the cost of your season ticket in the months you usually have to purchase it.

For items like food and drink, heating and clothing you should be able to get a good idea of your monthly expenditure by looking at your credit card statements and check book stubs, or your supermarket receipts if you save them.

Don’t forget to include things like property taxes, health care, utilities, childcare, education and insurance. Try to put these payments in the months they usually occur, rather than averaging them out over twelve months.

Write the words ‘Total Unavoidable Expenses’ in the first column, underneath your list of expenses. Add up the amounts of expenses for each month, and write in the totals.

## Step Four – Work out how much is left for discretionary expenses

Now you need to find out how much you will have left in each month for the things that make life enjoyable, such as entertainment and vacations, electronics and other luxury items. These are called discretionary expenses.

Leave a blank row under your ‘Total Unavoidable Expenses’ row, and label the next row ‘Amount Remaining’ in the first column. Then subtract ‘Total Unavoidable Expenses’ from ‘Total Income.’ Write the result for each month in the ‘Amount Remaining’ row.

With luck, there won’t be any months where the result is a negative number, but don’t worry too much if this happens. The aim is to have a budget that is at least balanced on an annual basis.

## Step Five – Work out your discretionary expenses

Leave a blank row under your ‘Amount Remaining’ row, and enter a new heading in the first column: ‘Discretionary Expenses.’

At this point, stick to the pattern of what you have been spending in the past on things such as eating out, going to the movies, vacations and electronic gadgets. If they result in a deficit, you can always trim your budget later. Once again, your best sources of information are your credit card statements, check stubs and store receipts. List your discretionary expense descriptions in the first column and insert the amounts in the monthly columns, preferably in months where you can see the ‘Amount Remaining’ is a positive number (that is, a surplus). Add up the amounts and put the totals in a new row labeled ‘Total Discretionary Expenses.’

## Step Six – Work out the end result

Now we get to the interesting part. Is your budget balanced, or do you have a surplus or a deficit?

Subtract ‘Total Discretionary Expenses’ from ‘Amount remaining’ to see the result for each month. This can be called the ‘Final Amount,’ so write this label in the first column and write the results of the subtraction in each monthly column.

## Step Seven – Work out annual totals

If you are using a spreadsheet, use the fourteenth column for annual totals of each type of income and expense and each sub-total. Check that your spreadsheet balances to the same amount in the bottom right hand corner, both across the columns and down the rows.

If you’re using paper and a calculator, you might prefer just to add up the monthly amounts in the five total rows, to show your annual ‘Income,’ annual ‘Unavoidable Expenses,’ annual ‘Amount Remaining,’ annual ‘Discretionary Expenses’ and annual ‘Final Amount.’ Then cross check your results. Add annual ‘Unavoidable Expenses’ to annual ‘Discretionary Expenses,’ and subtract this sum from annual ‘Total Income.’ The result should be the same number as the sum of the twelve ‘Final Amount’ columns.

## Step Eight – Review results and make adjustments

The most interesting total, the one you’ve been working towards, is the one in the bottom right hand corner, the annual ‘Final Amount.’

If you have a surplus (a positive number) for the full year, congratulations. Your total expenses came in at an amount less than your total income. You can now see how much you can afford to use each month to pay off some of that credit card debt. If you’re debt-free, you can add to your savings, increase your mortgage repayments or maybe splurge on some luxuries you’ve been longing for.

If you have a deficit for the year, you need to reduce some of those discretionary expenses to keep out of trouble. Aim to get your annual budget at least balanced, so that your expenses are no more than your income. Try to create a surplus if at all possible.

An annual budget is an important financial tool. You can compare your actual result each month with your budget, and correct your spending if you’re going astray before it’s too late. Best of all, you might get a pay rise, and this way you’ll be able to plan how to spend it, instead of wondering where the extra money went.