Now that you have learned about your cash inflows and outflows, here is an example of creating a personal budget.
Let’s say you are married and have two teenagers. You and your spouse both work full-time, earning $65,000 each per year, and your kids play house sports.
Cash Inflows is $8,000/month, after-tax. ($2,000 x 2 pay periods x 2 working parents)
CASH REQUIRED OUTFLOW
|Property Tax||$425 ($5,100/year)|
|Water & Sewer||$100 ($1,200/year)|
|House insurance||$200 ($2,400/year)|
|Cell Phone||$400 (4 phones for the whole family)|
|Vehicle Payment||$500 (two vehicles but one is owned outright)|
|Vehicle Gas||$400 (thankfully neither of you commute far)|
|Total Required Cash Outflows||$6,730|
NET REQUIRED CASHFLOW
CASH DISCRETIONARY OUTFLOWS PER MONTH
|Kids sports & activities||$100 (new gear is needed annually for growing teens)|
|Meals & entertainment||$300 (Starbucks is a habit for the whole family)|
|Total Cash Discretionary Outflows||$1,530|
When you subtract the cash discretionary expenses from the net required cashflow, you are left with a ($260). This means you are either using a credit card or a line of credit every month just to stay afloat. This negative amount will also continually increase month-to-month as you will have interest to include in your budget. Therefore, if you want to live within your means, you either need to have additional sources of income and/or reduce where you spend or save. Or maybe it’s time for your teens to get part-time jobs and pay for their own cell phone and/or clothes.
In our example, you have decided to spend less at Starbucks by $50. Vacation savings will also be reduced by $100 because you decide to stay-cation every second year, but the trip away now has more to spend. And you received some great news, the government decides you get Child Tax Benefits of $120/month, so you are now in the black with $10 left-over which can be added to your emergency fund or another Starbucks coffee.
Now try creating your personal and/or business budget and let us know how it works out for you.
Check out our next blog which has some tips for managing your cash inflows and outflows.
***This blog is for information only and not to be used as tax advice or planning without first seeking professional advice. Information is subject to change without notice.