Day one with working with a new client, the first question I always ask is “How much money do you think your life costs per day?” Flabbergasted, most make an educated guess. In 10 years of doing this, it usually is a lot lower than the actual number that they need to maintain their current lifestyle. This is where the magic of financial coaching begins! Please note, while this article is geared toward families, it can easily be translated into businesses.
This is the exact format that I use for my own companies and business clients as well, just substitute personal expenses for business ones. I refer to the following piece as Family Budgeting 101.
Set Up The Spreadsheet
Create Categories Where You Place Expenses
There are several categories that need to get laid down before the costs are put in the form:
1. Fixed Monthly:
The items that happen every month, no matter what, are relatively difficult to change: Rent/mortgage, childcare, fixed interest debt, cable bill, internet bill, to name a few.
2. Variable Monthly:
These expenses happen every month, but their price fluctuates based on usage. These include electric bill, gasoline for your car, eating out, and groceries.
This is where we put things that we want, but don’t necessarily NEED to survive. These would include gym memberships, vacations, salons, etc.
4. Periodic Expenses
Periodic expenses are where you would include your expenses that don’t always happen at a certain time, but over the course of the year, do always seem to happen. Here we include things like home improvements, oil changes, and vet bills.
If you have savings automated, this can go into the fixed expenses. I prefer to keep them separate so we can track growth and get subtotals. These are savings accounts, IRA’s, etc.
Calculate All of Your Family Expenses
Now that we have a spreadsheet to plug our data into, we can go through our expenses and list them. Then categorize where each item goes. I subtotal each category, but it isn’t necessary. The main idea is to see where money is getting spent.
1. Yearly Costs
Step 1 people usually fail to take into consideration that those big expenses that happen once per year still need to be factored into your family’s budget. Let’s say each year you take the family to another state to visit your parents. Altogether, the trip ends up costing your family $5,000. This trip only happens once per year, and because of that, many people do not take into consideration the fact that it needs to be accounted for all year. We break it down into daily, weekly, bi-weekly, and monthly costs.
You can do whatever time periods you want, these are just the most popular that my clients look for. Some want things like business days in which case we’d still do yearly but divide by 260 business days in the year. That vacation actually costs:
$5,000 / 365 = $14.29 per day,
$5,000 / 52 = $96.16 per week
$5,000 / 26 = $192.31 per paycheck (bi-weekly)
$5,000 / 12 = $416.67 per month
So while most just focus on the weekly / monthly costs that they continue to see, the big expenses can end up costing almost as much as your food budget alone!
2. Monthly Costs
In this section, many of my clients’ expenses fall. These include utilities, rent/mortgage, phone bill, etc. When filling out the Excel sheet, you will calculate the yearly cost of these and plug it into the yearly field. The rest will auto-populate for you. I use the formula (say my phone bill is $100 fixed every month) =100*12. This gives me $1,200 as my yearly cost and it will auto populate to show:
$1,200 / 365 = $3.29 per day
$1,200 / 52 = $23.08 per week
$1,200 / 26 = $46.16 per paycheck (bi-weekly)
$1,200 / 12 = $100 per month
While you already knew that the monthly cost would come out to $100, for scalability sake, it is easiest to plug all of your expenses into your yearly cost.
3. Weekly Costs
The weekly costs are usually the commonplace day-to-day expenses. Many of these, we have control over which are the “variable expenses.” This means that the price is not always an exact amount every week. The good news with variable costs is that these are usually the places we can save a lot of money in the long run. Remember, every dollar per day that you save, comes out to $365 per year!
Typical examples of weekly costs would be eating out, groceries, daycare, and gas. After reviewing your spending habits over the past 90 days, (I always check credit card statements for accuracy on variable guesses), you find that your average grocery cost for your family is $125 / week. Again, we use the formula to find what the yearly cost is and plug that number in =$125*52 which is $6,500 in groceries.
$6,500 / 365 = $17.81 per day
$6,500 / 52 = $125 per week
$6,500 / 26 = $250 per paycheck (bi-weekly)
$6,500 / 12 = $541.67 per month
We already knew the weekly cost was $125 per week, but the goal of this is to get numbers that fall nicely into the spreadsheet.
4. Totaling the Costs
Once we have itemized all of our yearly/monthly/weekly/daily costs we can find the total cost per any unit of time. With this number we can easily see where the money is going, and where we can make simple adjustments in our spending habits to save more money. There is one more expense that we are all stuck with and that is taxes.
Family Budgeting 101, it isn’t how much money you make, but how much you take home.
If you are living in the United States, you can guarantee that if you receive a W2 pay check that the amount that you get paid, is not how much money you have left to spend. That is why on my calculator, I also add a field to tack on income tax (by default we just put 30%, but you can change as it fits you) on top of the costs so that it actually shows how much it costs you.
If your paycheck is $2,000, after taxes, you can be looking at a take home of $1,400. Because of this, you need to add taxes to your costs because if your life costs $2,000 per paycheck, you are negative $600, even though you are earning the amount that you need to break even.
Taxes are one of the biggest reasons you hear about celebrities with millions of dollars losing everything.
If you make $5,000,000 in one year and have to pay 40% income taxes on that, you owe $2,000,000 back to the government. So even if you were “responsible” and “only” spent $4,000,000 in one year, and put away $1,000,000 for a rainy day, it will be gone and you’ll be owing the IRS $1,000,000.
We aren’t going to get political, but taxes will be lower this coming year for all tax brackets, but this is for illustrative purposes.
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