Looking at a Sample Budget

Meet Billie DeSantos, age 38, whose budget we're going to peek at to see how this process works.

Billie has worked at the same company for eight years, working up to management level last year. She bought a condominium six years ago, has a car payment on a three-year-old car, owes about $2,800 in credit card debt, has some money in savings, is a single parent with two kids (ages 10 and 14), and participates in the company's 401(k) retirement plan. Billie usually has enough money to pay the bills every two weeks, although the kids' growing expenses are starting to pressure the family's income.

Sample Financial Goals

The first step in developing a budget is to decide what you want your finances to allow you to do in life. To this end, Billie has the following goals:

  • Help the kids pay for college. Pay for half the expenses at one of the three large state universities (currently $14,500 per year for tuition, fees, room, and board) or put that same amount toward a private or out-of-state college.

  • Pay off the credit card in nine months. Get the balance to zero, and then if it's used at all, pay it off in full every month.

  • Retire from the company at age 50 (in 12 years) and open a bed-and-breakfast in a small coastal town. B&Bs in similar towns currently cost about $650,000 for the building and operation, but that price will surely rise in 12 years.

  • How do you envision your retirement?

    For most people, retirement doesn't mean an endless vacation, but it does mean doing more of what you love: Switching to part-time work at your current job, taking up a new career, starting a business, babysitting your grandchildren, or building your dream house.

  • Put away six months of income in a savings account over the next 12 years. This money would be for emergencies only, not to be touched for any other expenses.

Sample Income

Billie's biweekly income after taxes (which provides her with a refund of about $450 per year), company-sponsored medical and dental insurance (at a cost of $55 per pay period), company-sponsored life insurance for $250,000 of coverage ($30 per pay period), and 401(k) contributions ($75 per pay period, matched by the company) is $1,892, which totals $4,100 per month. Billie also has $1,700 in savings.

Remember to use these numbers only as a sample. If yours are much higher or much lower, that may be perfectly okay. Your situation is unique, and no one else's budgeting numbers should mean a whole lot to you.

Sample Expenses

Monthly expenses are as follows (learn how to total your own expenses):

Mortgage on the condo (30 years at 7.85%) includes taxes and insurance

$1,492

Car payment (4 years at 5.9%)

$342

Utilities

$375

Food (including eating out)

$675

Toiletries/haircuts

$85

Spending money/allowances

$200

Car maintenance/insurance/expenses ($1,600/year)

$133

Vacations ($2,800/year)

$233

Clothing ($3,200/year)

$267

Gifts and contributions

$200

Credit card debt ($2,800)

$50

TOTAL

$4,052

Sample Ways to Reduce Debt

Billie's monthly obligations equal her monthly income, so to achieve her financial goals, some expenses must be eliminated. Here's what Billie decides to do:

  • Keep the car and car payment. After paying off the car in one year, continue to drive it for five years after that, putting $342 into savings each month for the next car. No monthly savings.

  • Cut down on utilities, such as getting rid of her land line (going cell-only) and installing a programmable thermostat (at cost of $46) to save on gas bill. Estimated monthly savings: $83.

  • Spend a maximum of $125 per week on groceries. Limit eating out to pizza or Thai takeout once a week. Estimated monthly savings: $175.

  • Eliminate the small stuff -- keep Starbucks visits to once per week, borrow magazines and DVDs from the library, and otherwise reduce monthly spending money to $150 ($100 for both kids' allowances; $50 for Billie). Monthly savings: $50.

  • Investigate car insurance options to lower annual insurance costs by $400. Monthly savings: $33.

  • Limit vacation spending to $500 per year by being creative. Monthly savings: $60.

  • Allow each member of the family $600 per year to spend on clothing and shoes (teaching the kids budgeting skills in the process). Any more than that, and the kids will have to use their allowances or get part-time jobs. Monthly savings: $117.

TOTAL Monthly Savings: $518

Meeting Goals for This Sample

Billie must increase monthly savings and investments to meet her financial goals:

  • Refinance the mortgage on the condo at 5.8% for 15 years, paying it off in 12 (so that it can be sold, debt-free, to help pay for the B&B, which will then be mortgaged for 15 years). Monthly increase: $290.

  • Use savings plus increase in monthly payment to pay off credit card in nine months. Monthly increase: $122.

  • Begin saving for college in Section 529 fund. Monthly new expense: $600.

  • Put away a safety net of six months of income over the next 12 years. Monthly new expense: $170.

TOTAL monthly increase: $1,182

Revisiting the Sample Goals and Priorities

Billie is $664 short each month, so it's time to revisit the listed goals to see which can be changed or eliminated. Here's the revised list of goals:

  • Help the kids pay for college.

  • Pay off the credit card in three months, and begin saving for the kids' college fund only when it's paid off.

  • Retire from the company at age 54 (in 16 years) and open a bed-and-breakfast in a small coastal town.

  • Put away six months of income in a savings account over the next 16 years.

How many times should I adjust my budget?

Keep adjusting until your income exceeds your projected expenses (including money going into savings, retirement accounts, and so on). Until your financial obligations — including your financial goals — have been whittled down to fit your income, you don't really have a budget.

These changes mean the following financial adjustments:

  • Refinance the mortgage on the condo at 6 percent for 30 years, with the understanding that in eight years (when college savings will no longer be necessary), the money currently used to save for college will be redirected to the mortgage. Making those large extra payments toward the mortgage after the kids finish college will result in the mortgage being paid off in 18 years, not 30. Reduces monthly shortfall by $310.

  • Put away $130 per month into savings (instead of $170) over the next eight years, and then increase savings with reduction in food, utilities, clothing, and other expenses because the kids will have left home. Reduces monthly shortfall by $50.

  • Delay section 529 college fund by three months, using that money plus funds from savings to pay off credit card debt. After credit card is paid off, begin saving for college in Section 529 fund, putting $418 (instead of $600) away, with the understanding that all future promotions, raises, and tax refunds for the next eight years will go directly to the college savings account. Reduces monthly shortfall by $304.

TOTAL monthly increase from current spending: $0

Billie has created a working budget. It won't be easy to cut back, but the family does still have some discretionary spending money, the kids' educational savings are in good shape, and Billie will realize the dream of owning a B&B in just 16 years.

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