Monthly Budgeting Question

[logokster]

I am new to Dave Ramsey and am working on setting up my monthly budget. I have the financal peace personal software and input my income before taxes. Now when I go to input expenses, I don't see where to account for what I pay in taxes. I can add this as a category but knowing this is a common thing for everyone I would have thought this was factored in. Makes me think I am supposed to be inputting after tax income but then the percentages he supplied would not work. Help, what do others do.

[gmarie]

Most people budget with their after-tax income-but if you have business income you may want to add a budget line and due dates for estimated tax payments.

[bumplett]

Personally, we budget with our net income.

[HoustonDave]

We use an 'envelopes' software by snowmint called Budget. We use aftertax info for budgeting as well. But I agree if you have to pay estimated taxes, you might opt to use gross pay and budget for quarterly tax payment broken down by month.

[logokster]

Thanks for the responses. Let me clarify a little. In the software that I am using from Dave Ramsey, as you input your income and expenses, it will auto-calculate what the percent of the expense is of your total income. As an example if I make 12,000 a year pre-tax and give 120 a month in tithe then that is 10%. However, if I use after-tax income and budget from that, the percentage for tithe will be 12 or 13% which isn't accurate. As an FYI I have I am not self-employed and taxes are with held from my paycheck at work.

I am guessing after tax tracking makes things easier and I just have to know that the percentages are off.

Another question. The monthly budgeting tracks your budget vs actual expense on a monthly basis. When you are saving for an item that is not monthly, such as car insurance you would still budget each month but how are people actually tracking this. If I use my bank account to hold my money it is not like I can actually set the money aside in the bank into a subaccount called "car insurance". Do I need to switch to cash for most things? Just makes it tough to use cash for something like this when I would be writing a check to pay for car insuance and not mailing cash.

[bumplett]

Great question.

Personally, our insurance is monthly.... the only payments we have that aren't monthly tend to be yearly, such as HOA dues, so we just budget those into a specific month -

so I'm not sure why you wouldn't like to use your checking acct to hold the money earmarked for insurance?

if it's accounted for on paper, the bank acct is just a holding cell.

that's just me - not sure how others may feel?

yes, I do think the best idea is to use cash for most things, within reason - such as groceries, gas, pharmacy, etc.

We tend to be more accountable with cash, and this is where your envelope system really works for you!

Just my opinion of course..... good luck!!! You'll do GREAT!!!

[HoustonDave]

bumplett has it right. There's a difference between 'managing by accounts' and 'managing by envelopes'.

Think of it this way. You might have three places you keep your money. Checking, Savings, and Cash. But those aren't the 'envelopes' that you use to allocate what it gets used for.

Some people use cash envelopes only. But you can have a 'virtual' envelope system that you track on paper or using a computer program. My family uses Budget by Snowmint and it works great.

How it works is this. Every dollar you have already (cash, checking or savings) is allocated to some future expense or to pay down debt. And each time you get paid, you allocate that paycheck between expenses and debt reduction.

By doing this, you are "funding" your envelopes. Then when the bills hit, you pay from those envelopes (by either writing a check, or taking out of savings, or paying cash).

If you have a bill that is DUE quarterly, you can fund the envelope for it a bit each paycheck, which is the best way to make sure you don't get a nasty surprise when it comes due. I do this with our trash bill which is paid quarterly. Each paycheck, a few dollars stays in the checking account but is "allocated" electronically to the envelope for trash pickup.

What happens here is you end up with money in your checking account that you are NOT allowed to spend because it is in a 'virtual envelope' waiting for a particular expense later on.

If you opt not to spend the money for a program, you can do it using a spreadsheet or even notepaper. Like this:

1st Paycheck: $400 deposited in checking.
Groceries 'envelope' $100
Utilities 'envelope' $100
Gasoline 'envelope' $100
Car Insurance 'envelope' $15
Available for debt paydown $85

So you pay the $85 toward the debt, and that $15 toward insurance stays there. And next paycheck you add another $15. And it keeps building up in the checking account (and you keep tracking it electronically/on paper) until the insurance bill comes due and you spend it.

Make sense?

[bumplett]

I'm a pen & paper person myself -

[a.nonymous]

Thanks for the responses. Let me clarify a little. In the software that I am using from Dave Ramsey, as you input your income and expenses, it will auto-calculate what the percent of the expense is of your total income. As an example if I make 12,000 a year pre-tax and give 120 a month in tithe then that is 10%. However, if I use after-tax income and budget from that, the percentage for tithe will be 12 or 13% which isn't accurate. As an FYI I have I am not self-employed and taxes are with held from my paycheck at work.

I'm not familiar with DR's software but I assume you should be able to add custom budget lines. If that is the case, how about adding a line for tax deduction from paycheck? Then your percentages should be the way you want to see them relating to gross income.

The monthly budgeting tracks your budget vs actual expense on a monthly basis. When you are saving for an item that is not monthly, such as car insurance you would still budget each month but how are people actually tracking this. If I use my bank account to hold my money it is not like I can actually set the money aside in the bank into a subaccount called "car insurance". Do I need to switch to cash for most things? Just makes it tough to use cash for something like this when I would be writing a check to pay for car insuance and not mailing cash.

We use additional accounts for these types of items. Not an account for each one of them, but a savings account to pile up the money in there. It is important, though, to keep track of how much in that pile is earmarked for which future expense.

[227melissa]

we budget on net income also. Salaried so always the same amount.

[logokster]

Great Responses. In the DR software, I did add a tax budget line item and am using gross income in lieu of net income. I like having the percentages be on, makes me happy.

For tracking items that accumulate over time I was thinking the "Virtual Envelopes" was the way to go, I just haven't thought through the process that will work for my wife and me.

Thanks to everyone for the help. If others have suggestions I am always open to ideas.