How to Carry Out Sophisticated Budgeting Analysis

Periodically, you should take time to complete a budgeting analysis to see how your current budget is working for you. When you set a budget, you do so based on the current factors such as your income and base expenses. Since these factors change, it is important to make your budget change with them. You may even find your budget can become much leaner, allowing you to save for larger expenses in the future.

Calculate Net Income

Net income is the exact dollar figure you bring home on a daily, weekly, monthly or annual basis. Many people prefer to budget monthly since they tend to receive their paychecks and bills on a monthly cycle. In this case, the factor you will work with is the monthly income you generate. This is easy to calculate if you receive a paycheck from an employer. Net income is the amount you deposit into your account on a monthly basis. Determining net income is harder if you own your own business or work in a heavily commissioned industry. You may find you have to find an average net monthly income based on your previous and expected earnings.

Determining Fixed Costs--50 percent

Then, begin factoring in fixed costs. These should never amount to more than half of your net income. Fixed costs may include your mortgage, rent, car payment, loan payments or insurance. It is wise to think of savings as a fixed cost. For example, contributing 4 percent to your retirement account takes a priority only second to paying your fixed-cost expenses. The more you think of saving as a fixed cost, the more likely you are to save the money you need for the future.

Making Room for Necessary Expenses--30 percent

There are some expenses that are not fixed but are nonetheless necessary. For example, you will need to spend money each month on groceries, household supplies and a certain amount of clothing or personal hygiene purchases. These are items you cannot escape paying for, but you can be flexible with these expenses. Here is the area where many Americans fail to budget properly. Many people are likely to cut back on items such as movie tickets or dinners out when they need to save money, but few are likely to reduce their grocery bill. With proper budgeting, you can reduce even the expense of your necessary items. Review your bills for these items for the past six months. Did you spend more than 30 percent of your net income on these items? If so, find ways to cut back.

Choosing Luxury Purchases--10 percent

Finally, you may be able to spend as much as 10 percent of your income on luxuries such as dinners out and entertainment. You will notice this leaves an extra 10 percent in your budget. It is wise to leave this wiggle room for expenses you cannot foresee, such as a flat tire, parking ticket or other necessary payment. You will find these items consistently cost money, and having room in the budget for them is necessary.

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