Barbara O’Neill, Ph.D., CFP®
Extension Specialist in Financial Resource Management
Rutgers Cooperative Extension
Want to take a small step to improve your finances? Create a budget and follow it. Budgets (a.k.a., spending plans) are a plan for spending and saving future income. They project future income and expenses with a goal of having positive cash flow (income greater than expenses, including savings for future goals as a fixed “expense”). Developing and following a budget requires tracking, recording, and adjusting expenses and personal qualities such as discipline, motivation, and sacrifice (i.e., spending less today to save for the future).
The word “budget” is also seen in literature and recommendations about health and nutrition. People can visit an online Calorie Calculator and get a daily calorie “budget” based on factors such as age, gender, height, weight, and activity level. For example, if a calculator says you need 1,874 calories to maintain your weight, you'll lose a pound a week if you consume 1,374. A financial equivalent example is earning $50,000, budgeting to spend $46,000, and saving $4,000.
What does research tell us about budgeting? It says that formal budgeting using software or a pad of paper is not widely practiced and that people who prepare detailed household financial budgets are in the minority in the U.S. Despite expert recommendations to follow a budget, studies have found that many people fail to do so.
One study found that less than half (46%) of over 1,000 respondents used a budget and 36% planned and set future goals. Research using data collected from the Rutgers Cooperative Extension Financial Fitness Quiz investigated the performance of 20 financial practices. Budgeting was among the five quiz items least frequently performed, ranking 16 out of 20, in order of mean scores.
A widely quoted Gallup survey found that only 32% of American households prepare a written budget or use software for a spending plan. When budgeting is described in a less rigid terms (i.e., without having to be in a written form), however, more Americans say that they do it. For example, a survey by Bankrate Inc. found that 82% of Americans kept a household budget. However, only 36% of those surveyed used a pen and paper while 18% kept information in their heads and 26% used a computer program or smart phone app.
Recent research by Rutgers Cooperative Extension, using data from the Personal Health and Finance Quiz, suggests that people who budget their money may be inclined to also budget their calories; i.e., have a daily calorie “allowance” and self-restrict personal calorie consumption and/or adjust their level of physical activity level to stay within it.
What to do? Develop a budgeting mindset. What this means is setting overall limits for spending and finding ways to live within your plan. The most common ways of doing this are increasing income, reducing expenses, or doing a little of both. Start by making a list of what you earn and spend. Household earnings include net (after-tax) income, benefit payments (e.g., Social Security, unemployment, disability), child support or alimony, public assistance, self-employment income, interest on savings and investments, and other income sources.
Once you total your monthly income, do the same for expenses. Using spending records as a guide, list fixed expenses such as housing, car loan payments, and insurance premiums. Next, list flexible expenses such as food, transportation, and gifts. Finally, make a list of periodic expenses and divide the annual by cost by 12 to arrive at a monthly cost. For example, $4,000 of annual property taxes costs $333 monthly.
Budgets should balance the “bottom line.” In other words income should equal expenses, including savings. It generally takes several attempts to get the numbers to balance out. This is perfectly normal and to be expected. If you are working the numbers by hand, use a pencil with a good eraser. Rutgers Cooperative Extension has a downloadable Spending Plan Worksheet and a budgeting spreadsheet that uses pre-programmed Microsoft Excel® software to make income and expense calculations with a computer.
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