Congratulations on putting a budget together as it’s one of those things that people tend to shy away from as they believe it is too much work. I agree it is work but once you have it in place it’s easy street after that.
One of the frequently asked questions I get is, How do I know how much money to put in each category? If you have followed my Budgeting Series you will read about how we designed our budget but not so much the calculations we used to come up with the numbers. I wanted to show you some examples of how we may have arrived at our numbers.
How to make the right calculations work for your Budget!
Yes it’s all about the numbers and don’t be afraid the math won’t bite you!
Let’s start at the basics…..during the month you’ll spend money and earn money, it’s a way of life. Normally you wouldn’t take much notice of how the payments are setup until now. Now your listing payments on a budget sheet and trying to track them. Payments of bills or wages can come in a variety of schedules…….tracking them on your budget depends on which ones you’re working out.
Here’s an example:
You get paid a Salary that’s paid to you monthly at $3000 (net) which is easy, the budget is already set out month by month, all you enter for income is $3000. But what happens if it’s weekly?
You earn $750 per week (Net), sounds the same as the one above right? Wrong…..there’s 52 weeks in a year so to convert it to the same time frame as your budget (i.e. Monthly) we’ll have to work it out.
$750 x 52 weeks = $39,000 and then divide by 12 (months) to get your monthly figure of….
$39,000 / 12 months = $3250 per month.
Bi-weekly will be the same as weekly just x 26 (that’s half of 52)….
$1500 X 26 weeks = $39,000 / 12 months = $3250 per month.
The same rules apply for bills, say car payments are set up bi-weekly……$250 every 2 weeks:
$250 x 26 weeks / 12 months = $541.67 per month.
The monthly figure only needs to be set up for your BUDGETED monthly costs, NOT what you actually pay out each month. Take a look at the calendar in any given year and they’ll be months with 5 pay periods (based on weekly pay), 3 pay periods if it’s bi-weekly. This has an effect on your income and bills every so often where you’ll get extra pay one month but you’ll also have extra payments to make.
Here’s an example:
You pay your mortgage bi-weekly at $650 making most of your monthly mortgage payments at $1300, but that extra period will now make your monthly mortgage a total of $1950 !! That’s quite the difference especially if your pay is on a monthly basis as you won’t have the advantage of having an extra pay.
One great reason to convert everything to monthly payments is to smooth out the up’s and downs and give you a more stable figure of what your actual monthly costs are. It will allow you to save extra in the months you’re under budget and have more cash for those months that require more money.
As a reference for 2012 – extra pay/bill periods are in Bold:
Another quick tip before I go……I know I just told you to convert to monthly but always calculate your budget based on your smallest monthly income (i.e. basic hours, no overtime), if you’re having to work overtime just to make ends meet you’re already in trouble.
I calculated my income (basic hours) based on my 2 pays per month (I’m paid bi-weekly) and consider the extra pay period every so often as a bonus. My mortgage payments are weekly but converted to monthly for the budgeted costs so every month I’m putting a little away for those months I have to pay an extra mortgage payment.
When the time comes I already have the money put aside and ready to pay that extra payment in our “projected expenses” account.This is an account where we save money for expenses we know we will have to pay at some point in the year. We factor in these costs to our monthly budget and set them aside… hassle free bill paying!
So before you rush off to make your budget make sure you calculate the right figures in order to balance the budget and spend less than you earn!
- April 2012 Canadian Budget Binder Family Budget Update (canadianbudgetbinder.com)
- Net Worth Update April 2012 CBB- Life is Good! (canadianbudgetbinder.com)
- How We Calculate Our Net Worth~Now Calculate Yours! (canadianbudgetbinder.com)
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