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| Frequently Asked Questions About Budgeting |
| Written by Gloria Zhu | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
 1. Why should I bother creating a budget? It is important to create a budget no matter where you stand financially. It does not matter if you are in debt or are well off—budgeting is a way of organizing and monitoring your cash flows on a periodic basis. When you are able to earn enough income to cover their bills and have a regular monthly surplus or discretionary income, a budget can help maximize investment capital by reminding you what else you should place your money in such as retirement accounts, college education plans, and personal investment accounts. However, for those who are less fortunate and have monthly expenses that eat a large portion if not all of your net income, any budget can help you identify and classify all the expenses that occur during the month, quarter or year that you can cut down on. Tip: Budgets are especially useful when you prepare for a major life change. (ie. Moving to a new home, having a child, or entering retirement) These situations generally vary greatly from existing spending patterns, but being prepared and having a good amount of savings provide the best chance to have the funds necessary to get through them smoothly. Also, another benefit with budgeting is that when you are more aware of all your expenses compared to how much money you have, there is a psychological effect There’s also an inevitable psychological effect from creating a budget and laying all your expenses “on the table”. Many people may not realize how small purchases add up, and they are spurred to change their spending to reduce excessive costs. Also, having a budget in which all the anticipated expenses for the year are accounted for can be very satisfying and can remove a large weight off your mind and shoulders. 2. What is the best way to budget for holiday and special event spending? Now that you have a budget established, you must include these holiday and special event spending in your plan. With a little insight on which events you will be needing to spend the most on, the most difficult task now is determining how much you will be need. Start by looking through receipts and bank statements to find out what you spent on gifts, travel, food, decorations and the like in the past year. When determining these events, decide whether they are annual or one-time events such as a graduation party or a birthday. Hint: Some experts say that you should not be spending more than 2% a year of your total annual income on holiday gifts. You may decide to create a Christmas club count at your local banking institution which allows you to place small amounts of money on a weekly or monthly basis beginning in January. This program provides a modestly higher interest rate compared to standard checking or savings accounts because you are committing to put the money away for the majority of the year. You will be charged if you decide to withdraw before then. 3. How should I estimate my income from fixed sources like bonds, CDs and stocks? The first step is to create a spreadsheet or other program that lists all the approximate due dates and yields of your holdings. Here is a breakdown of the due dates for some common fixed-income sources: Bonds & CDs – Government, corporate, and municipal bonds tend to pay their interest semiannually—but you will have to determine which months in particular individually. Specific bond coupons can be obtained from account statements, brokers or advisors. This schedule also applies to certificates of deposit (CDs) from a bank or other institution. Money Market & Mutual Funds – Many fixed-income mutual funds and exchange-traded funds will pay their income monthly. The exact amount distributed each month will vary based on market conditions, but a current yield figure can be found online or through a broker and used to calculate a pro-rated amount that will be sent to your account each month. Stocks – Common stocks that pay dividends typically distribute this income once per quarter, or four times per year. Yield figures for stocks can also be found through many media outlets or through a financial advisor. Preferred stocks may pay their dividends quarterly or monthly, but the dividend rate is typically locked in at issuance. A hypothetical portfolio could look like this on an income estimation spreadsheet:
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| Last Updated on Friday, 24 December 2010 06:23 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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