- Income is typically the first category in the budget. Most people’s income is generated through employment. Income should also include any other monies coming into the household, be it from rental property, interest and dividend income, alimony or child support, Social Security, tax refunds, or help from a relative or friend.
- Monthly fixed expenses are those expenses which are the same each month. The items that will typically falls into this category include: Rent/mortgage, car payments, childcare, fixed interest rate debt, child support, alimony, cable TV and Internet bills. Individuals should include any regular contributions to savings here as well.
- Monthly variable expenses are expenses that occur monthly, but the amounts vary. Examples of these expenses include; food, payments on variable interest rate debt, utilities bills, dry cleaning and transportation will comprise of the majority of these expenses. As some of these expenses such as home heating and cooling can fluctuate dramatically according to seasons, it may be easier for individuals to include averages for these items in their budgets.
- Periodic expenses occur regularly, though not necessarily monthly. Because these are not monthly occurrences, these are the expenses that individuals will often forget about when sitting down to formulate a budget. An example of this is auto or home maintenance. We all know that both of these items need to be cared for, but how much we spend on them can easily be forgotten about when determining how much money should be set aside on a monthly basis for these items. For expenses such as these it is best to determine what has been previously spent and then a monthly amount should be set aside in a savings account for future maintenance.
Other expenses that will typically fall into this category include property taxes, insurance premiums not paid on a monthly basis such as medical, life, homeowners and automobile insurance.
- Discretionary expenses are those expenses that individuals will refer to as their “I wants” as opposed to their “I needs”. When faced with limited financial resources, these are the first items that you may recommend they trim from their monthly expenditures. However, it is important to include some discretionary spending within a budget because every now and then individuals do need to have a little fun or do things for themselves.
Discretionary expenses include travel, gifts, personal care such as going to the hairdresser or barber, entertainment, charitable giving, subscriptions and clothing. It is also here that you can include other incidental expenses that may not fit into other categories such as cigarettes, lottery tickets and pet care.
- Reviewing the Budget
- Once you have collected all of the income and monthly expense information you now can complete the cash flow analysis.
- Depending on income eligibility you may also want to see if the individual or family you are working with qualifies for certain tax credits such as the Earned Income Tax Credit (EITC). The EITC is a federal income tax credit for low-income working families and individuals. Visit www.irs.gov to help determine their eligibility.
- When reviewing the budget, you should also keep in mind that monthly fixed and variable debt payments combined should be less than 20 percent of a person’s monthly gross income, not including rent or mortgage payments. This refers to the monthly payments not to the total outstanding debt. If you find that their debt is in excess of that, you may need to make recommendations around dealing with debt management, not just with cash flow management.
- Lastly, any budget recommendations that you decide on, and any choices made about how to get there, should be realistic.