The foundation of a good budget will help you have a financially secure future. Establishing a household budget is no different than developing a budget for a business. There are the three hurdles you must overcome in order to achieve success.

1) Collecting data - This section covers the basics of what's known in the business world as the Profit and Loss (P&L) statement. Your household has a P&L statement as - your total income, minus all your expenses. If the difference is positive, you've got additional funds to save. If it's negative, then you'll need to revise your budget.

Collecting the required data is not nearly as difficult as it sounds. From your income taxes, you already have ready access to two of the three important pieces: 

1. Total income
2. Taxes paid

The final piece of information is your historical expenses. Try to assemble as much of your actual information as possible from the previous years' receipts. If you don't have or can't find certain categories of information, do your best to estimate those figures.

Here's a tip: You should expect to spend one weekend per year on assembling your annual budget. This is time well spent since developing your budget allows you to remove the mysteries of where your money goes. It establishes how well you're doing currently, and helps you to project your future financial health.

2) Developing your budget - Once you've collected as much data as possible, its time to develop your budget. The first step is to establish the categories that you'll use to track the inflow and outflow of your money. Use the typical household sample spreadsheet below as a guide... you will add and delete categories to fit your spending habits.

It's important that you divide your "expenses" into two sub-categories, "mandatory" and "discretionary", and rank them in order of importance (from most to least important). The reason for this is that if you have a financial shortfall when comparing your expenses to your income, or an emergency arises, you'll already have predetermined what you truly consider to be important expenses, and those that can be immediately cut.

A few important points:

1. To be successful, you can't have a category called "Miscellaneous." This category tends to contain a large percentage of your "hidden" or "mystery" expenses. If you do use the miscellaneous category, you'll likely end up asking yourself the question "Where did all of my money go?"
2. Avoid having so many categories that tracking your budget each month becomes painful. If it does, you're unlikely to stick to your budget.

Now that you've established a spreadsheet, the next step is to enter the percentage of your budget that you plan to spend in each category. Use a combination of your historical data (as a percentage of your total income) and your estimates.

The goal is to ensure that the bottom line "Net Total" is equal to or greater than zero. If you find yourself with additional funds available, add them to a "Mandatory: Retirement-After Tax" category or to a "Mandatory: Cash Reserve" category.

A tip: As a rule of thumb, your "Cash Reserve" should grow to contain between 6 and 12 months of either your total salary plus bonus or your "Mandatory" expenses. You should establish a retail account for your cash reserve and invest the money in a relatively secure and liquid set of investments. The money in this account is intended only for medical and financial emergencies. Until this account is fully funded, additional insurance and lines of credit can be used to supplement this fund.

In cases where you find yourself with a negative "Net Total" you can then use your ranking system to either start reducing expenses from the least important categories, increase your income, or both. In other words, you're taking exactly the same steps that a corporation would take if they forecast a budget deficit.

Important notes:

1. The percentages listed on the sample spreadsheet are intended as a guideline.
2. Expenses listed in the "Mandatory" section are generally not scaleable. This means that they are relatively independent of your total income. One of the ramifications of this assumption is that as you generate more income, the "Subtotal: Mandatory" percentage will decrease as a percentage of your total income. The opposite is also true.
3. Raymond James & Associates is not a tax consultant. The taxes listed are ballpark estimates. Please talk with your own tax advisor to obtain a more accurate representation of your particular situation.
4. As your household changes (new jobs, purchasing a home, marriage, children, college expenses, retirement, medical bills, etc.), your budget will need to change as well. For example, medical expenses are usually a small percentage of your annual budget but could grow to be a substantial portion of it during your retirement years. Some of the increases in medical costs will likely be offset by the decrease in your mortgage payments, assuming that you don't purchase a larger home during retirement, but not necessarily all of them. This is one of the reasons why, in financial planning, we usually set required retirement income to a large percentage (80% to 100%) of pre- retirement income.

If this is your first time establishing a budget, this will be a very enlightening, and in some cases a shocking experience. Completing a budget forces you to determine where your money is going. It will likely bring to light issues such as "nickel and dime" syndrome. This scourge occurs when you pay a little bit of money on a weekly or monthly basis. Those expenses can add up very quickly. Simply determine if you're obtaining good value for each of the expense categories and keep the ones that provide a good return on your money.

3) Sticking to your budget- Congratulations, you've now completed what most successful households and businesses complete: your Profit & Loss (P&L) statement. You're well on your way to meeting your financial goals.

Sticking to your budget is your last hurdle. I recommend that you compare your actual expenses to your budget on a monthly basis. This can be done with pencil and paper, spreadsheets, or with specialized computer programs. Pick the most comfortable tool to ensure that you stick with your budget.

Here's another tip: If you are computer literate, consider investing in one of the two major software packages: Quicken or Microsoft Money. Raymond James & Associates, as well as many credit card companies, allows you to download transactions into these programs. Avoiding the task of data entry is a real time saver.

If you see a negative divergence from your budget, address the issue immediately. The best way to solve this problem is to reduce your spending in the particular category. Avoid at all costs the temptation to increase your budget. Remember, that you spent an entire weekend developing your budget and it's unlikely that your "new answer" is better than your original answer.

Your Financial Advisor should be an integral part of your budget. The best advisors will provide you with unbiased feedback and help you to make key decisions. In addition, the financial and investment plan that you developed with your financial advisor drives many of the key items on both the income and expense side of your personal P&L statement.

Having completed both personal P&L statements for my family for over a decade as well as having completed them for corporations, I can assure you that the process is worthwhile. Financial planning eliminates most financial mysteries and helps to control variables by having preset plans of attack in place, in case of unforeseen circumstances. The true benefit is a good night's sleep.

Thomas Libertiny
Associate Vice President, Investments. Raymond James & Associates

*Sample Spreadsheet-Typical Household Budget	Categories	% of Totals	Annual	Monthly
Income	Salary	95%	$30,000	$2500
(Salary, Bonus, Investment Income, Estate Planning Gifts)	Bonus	5%	$1,500	$125
Total Income		100%	$31,500	$2,625
Expenses - Divided into two (2) categories
Mandatory (Food, Taxes, Primary Residence: Maintenance & Supplies, Clothing, Insurance, Medical & Dental, Fitness, Professional Fees, Automobile, Retirement--Pre-tax, Education, Retirement--After-tax, Cash Reserve, Credit Card Interest, Phone/Cell Phone.)	Rent	13.3%	<$4,188>	<$349>
	Food	3.4%	<$1,104>	<$92>
	Clothes	3.7%	lt;$1,164>	<$97>
Mandatory Subtotal		20.5%	<$6,456>	<$538>
Discretionary (Charity, Dues, Landscaping, Gifts, Vacation, Primary Residence: Improvements, Entertainment, Sports, Individual Discretionary, Estate planning Gifts, Secondary Residence, Aircraft & Boats)	New Patio	9.5%	<$3,000>	<$250>
	Europe Vacation	15.88%	<$5,004>	<$417>
Discretionary Subtotal		25.40%	<$8,004>	<$667>
Total Expenses		45.90%	<$14,460>	<$1,205>
Net Total			$15,540	$1,420