With no frills, what does it cost you to live for one month? That’s your financial nut. This is the bare minimum that you need every month to get by.

Chances are, you have a sense of what this number is, but you need to get it down on paper, along with your total household income. For this, you need a budget.

A budget is a powerful tool, and it does a lot more than define your financial nut. It also helps you define your financial goals and map out a plan to reach them. It helps get you and your spouse on the same page, provides an objective means to check up on yourselves and alleviates the emotional pressure that so often accompanies decisions about money and spending. Unless you have unlimited income, a basic budget is fundamental to successful financial management.

Your budget should be a mirror of the cash flow in your household: money in, money out, money held in reserve and money stored for the future. Don’t guess. Set aside the time to do the research and make the effort to do a thorough assessment of each part.

Income

Be sure to list all routine sources and amounts of your income. For most people, salary and wages are the main components. Your paycheck has deductions for taxes, Social Security and Medicare. You can design your budget using “net” income (the amount left after the deductions) or “gross” income (before deductions), but be sure to be consistent with all your income streams. If you use “gross” income, list the deductions at the top of your expense sheet (see below).

Since many expenses are monthly, it is generally most useful to structure your budget on a monthly basis. If your paycheck is weekly, multiply the amounts (salary/wages and deductions) by 4.333 to determine their monthly equivalents. If it is bi-weekly (every two weeks), multiply by 2.167. If it is bi-monthly (twice a month), multiply by 2.0. Gauging income is often more complicated for construction Laborers because it varies so much from season to season. One option is dividing your total wages on last year’s tax return by 12.

If you get regular income from other sources, list them and the amounts.

Expenses

The key to effective calculation of your expenses is making sure everything is included. You spend money in various ways: cash, checks, debit cards and credit cards. Use your statements as a starting point and be honest and objective in assessing your cash purchases. One way to better control cash spending is to put your entire paycheck into a checking account and withdraw cash from the account as needed. Your check register and monthly bank statements provide a list of your expenditures, including your cash withdrawals.

A variety of internet sites offer budgeting assistance and provide lists of likely expenses (see sidebar for a basic list). Add other categories that are significant parts of your expenditures. The “Miscellaneous” line is the total of all small items that do not warrant their own itemization; many of these are among your cash purchases.

Many expenses are “fixed,” paid weekly, monthly or annually. Others are occasional or “variable,” occurring at irregular times or in irregular amounts throughout the year. Whether fixed or variable, expenditures need to be recalculated to show their monthly average.

You should review and adjust your budget and plans annually or whenever a significant change in your financial circumstances occurs.

The Financial Nut and Your Options

When you compare the financial nut to your income, you can see your options. If the nut exceeds your income, you’re running a deficit, and you need to find ways to cut your expenses (unless you have a good way to increase your income). If your income exceeds the nut, you have “discretionary income;” money that you can use as you wish.

[Steve Clark]