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A Management Tool for Expenses

Dear Dollar Stretcher,

I want to make a grocery budget but I am not sure what to include on that list. Do you include your household items such as light bulbs and laundry needs? Regular household needs such as bath tissue and paper towels? My husband and I would like to reduce our grocery bill but as it stands everything for the house comes from our grocery budget.
Kathy

Kathy asks a good question. According to the federal government the average family spends about 14% of their after tax income on food and another 1% on household supplies. So keeping track of these expenses is important.

She’s on the right track. Her budget should be a management tool. It’s purpose is to help you quickly identify problems and possible solutions.

You ‘read’ a budget just like a management report. Begin at the bottom and work your way up. You’ll start with the bottom line totals. Then check the subtotals. Finally, if necessary, you’ll look at the detailed part of the budget.

Start by finding out two things. Was your income near the expected level? And were your expenses close to the budgeted amount? If both totals were close to what you expect you can be pretty sure that things are under control and you don’t need to spend a lot of time looking for problems.

Next you want to look at the subtotals. That’s how you find what category is the source of any unexpected mismatch. Most managers will start with the groups that include the biggest expenditures. For families that would be housing, autos and food.

If your actual and budgeted subtotals match in a category you can pretty much skip the details that make up the subtotal. It’s taken just a moment to verify that everything is fine. An efficient use of your time.

If you find a difference between the actual and expected subtotals you’ll want to look at the individual expenses that make up the total. Again you’re looking for actual expenses that are much different from what you expected.

In most cases by going from the totals to the subtotals to the individual line items it’s easy to find any problems. That’s because you’ve narrowed the search to a reasonable area. And once you’ve found those problems you can decide what changes are required to get things back into line again.

Consider Kathy’s food/household products situation. By combining the categories she has found it difficult to determine what’s causing them to spend more than they want. So until they can get that area under control they’ll want to split out household from grocery items. And even that might not be enough. They may even need to separate meats from vegetables and canned goods. Or any other division that will help her understand the problem.

Once she’s brought the offending expense back into line they can combine the two categories. It only saves a few minutes when she enters the data, but her time is valuable.

Another thing to remember is that you don’t always have to do things the same way. For instance, Kathy may combine the category without problems for a year and then suddenly begin to have troubles. She has two choices. She can go back to her receipts and split the category for the last month or two. Or, if it’s not a crisis, she can beginning splitting into two categories this month.

The same thing is true for other categories. For instance, if your entertainment category is growing you may need to separate DVD rentals and movie tickets from dining out. Whatever will help you easily identify where your money is going.

The key to remember is that you only want to collect as much information as you’ll need to find problems when they occur. Information overload can make budgeting time-consuming and set you up for failure. The trick is to not waste time collecting info you won’t use, but to still have enough data when you need to find a problem. That means that there is no one right answer to Kathy’s question. It all depends on how much info you need at the time.

This article by Gary Foreman first appeared on The Dollar Stretcher and was distributed by the Personal Finance Syndication Network.

The post A Management Tool for Expenses appeared first on Personal Finance Syndication Network.

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