June 2017
Barbara O’Neill, Ph.D., CFP®
Extension Specialist in Financial Resource Management
Rutgers Cooperative Extension
A small step that everyone can take to increase their wealth and financial security is to develop and follow a budget. Unfortunately, the word "budget" is viewed by many people as very negative word. Like the word "diet," people think of the three Cs (cut back, cut out, and can't) or the three Ds (denial, deprivation, and don't). A much better way to view a budget is as a tool to enhance your future financial security.
A budget is a plan for future income and expenses, including savings required to achieve financial goals. Ideally, a budget should be written (paper, computer spreadsheet, etc.) with specific categories of income and spending and dollar amounts. Benefits of budgeting include providing "guardrails" (i.e., designated limits) for spending, achieving financial goals (if savings is included as a fixed "expense"), and for peace of mind.
Budgets are a future-oriented financial document that project income and expenses with a goal of positive cash flow (i.e., income greater than expenses). Developing and following a budget requires a level of attention to detail (e.g., recording and adjusting expenses). The first step is to carefully track income and expenses to determine current spending levels. Be sure to include periodic expenses and divide their annual by cost by 12 to arrive at a monthly cost. For example, $4,000 of annual property taxes costs $333 monthly.
The second step is to use the income and expense tracking data to determine future amounts for each category of income and spending. The goal is for income to equal expenses, including savings, to balance the "bottom line." 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. With computer spreadsheets, you can easily change numbers and do a variety of calculations with the click of a mouse.
Research indicates that people who prepare a detailed household financial budget are in the minority in the U.S. Despite expert recommendations to develop a budget, recent studies have found that less than half of all Americans actually do. One study of results from a national survey about financial management practices found that less than half (46%) of 1,004 respondents used a budget and 36% planned and set goals for the future.
Research using data from the Rutgers Cooperative Extension Financial Fitness Quiz investigated the performance of 20 financial practices using an online financial self-assessment tool with 10,661 respondents from 2005 through 2010. Budgeting was among the five quiz items least frequently performed, ranking 16 out of 20, in order of mean scores. A widely quoted Gallup Economy and Personal Finance Survey in 2013 found that only 32% of American households prepare a written budget or use software for a spending plan.
When budgeting is described in less rigid terms (i.e., without having to be in a written form), more Americans say that they do it. For example, a survey by Bankrate Inc. in 2015 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.
All of these research findings indicate that budgeting needs to be convenient for people to do if it is to be performed as a routine financial management practice. Rutgers Cooperative Extension has several online resources to assist with budget preparation. To download a worksheet that can be completed with a pencil and a hand-held calculator, visit http://njaes.rutgers.edu/money/pdfs/fs421worksheet.pdf.
To download a spending plan spreadsheet that uses pre-programmed Microsoft Excel® software to make income and expense calculations with a computer, visit http://njaes.rutgers.edu/money/templates/Spending-Plan-Template.xls. Placeholders in the rows and columns of the spreadsheet allow users to enter data on their own personal computer with mathematical calculations are already pre-programmed.
Want to build wealth and take charge of your finances? Develop a budgeting system that works for you.