Forecasting – A Vital Step in Budgeting

[Chad Storlie USAA]

Forecasts are something that we associate more with the chance of rain or, hopefully, the federal budget.  Forecasting for our personal budget is a great additional tool that can really help make our budget work. Whether for an individual or a family of seven, forecasting is a helpful monthly activity for a household budget to remain on track and a useful tool for financial management.

The purpose of your family budget is to ensure that your expense amounts and your income amount match and your spending align with your family priorities. As we all know, when expenses exceed income, financial trouble eventually ensues. Forecasting helps the budgeting process because expenses and income sources are rarely the same for all months of the year and a forecast that anticipates these variations is critical to ensure your budget remains valid throughout the year.

Here are Five Critical Steps in the Family Budget Forecasting Process:

1. Family Budget Forecast Step #1 – Categorize Your Stable Expenses with Amounts. Full time daycare is an example of a stable monthly expense. You pay the same amount if there are 31 days in the month or 28.  Setting aside a fixed amount each month for savings is another example. Record the precise amount and the date the payment is due.

2. Family Budget Forecast Step #2 – Categorize Your Stable Income with Amounts. Just like expenses, if we are paid a salary for our primary job, then we can predict and precisely record our primary source of monthly income.  Record the precise amount and the date the payment to you is due.

3. Family Budget Forecast Step #3 – Categorize Your Variable Expenses with Amounts. Almost every month of the year, we can have variable expenses. Variable expenses include extra electricity payments for cooling our house in the summer, payments for Christmas presents in December & January, or paying for a vacation. We also have variable annual expenses such as insurance payments and relicensing automobiles.  Forecasting for this variable category of expenses to capture the reason, estimated payment date, and amount is the make or break for most budget accuracy. Take the time to fully capture all the items in this category from Auto Maintenance to Uniform cleaning; there are lots of variable expense items that your budget must anticipate.

4. Family Budget Forecast Step #4 – Categorize Your Variable Income with Amounts. Just like variable expenses, we also have variable additional income from time to time. The extra money to cover travel expenses when a service member is on Temporary Duty (TDY) or selling some personal craft items as a “second” small business ventures are all additional income categories that have to be anticipated. Record the precise amount and the date the payment to you is due.

5. Family Budget Forecast Step #5 – Create a Summary Category for Savings. Once you know your monthly variable income and variable expense items, you can combine them to see what additional money you need to place in savings and take out of savings each month. This overall “Summary Savings” category of your combined variable income and variable expenses is what makes your entire budget operate correctly. You should also have a 10-15% buffer to cover potential changes or variability in your forecast. Taking the steps to actively place this amount into savings each month is critical so the money is there to withdraw it when your expenses temporarily exceed your income.  

Forecasting helps the budgeting process because expenses and income are rarely the same for all months of the year and a forecast that anticipates these variations is critical to ensure your budget remains valid throughout the year. Use forecasting as an essential step in your family budget process to ensure expenses and income sources match throughout the year. Finally, use this process to ensure that you are forecasting your emergency savings as well as your retirement plan.

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About the blogger:

Chad Storlie is the author of two books: Combat Leader to Corporate Leader and Battlefield to Business Success. Both books teach how to translate and apply military skills to business. An adjunct Lecturer of Marketing at Creighton University and Bellevue University in Omaha, NE. Chad is a retired US Army Special Forces officer with 20+ years of Active and Reserve service in infantry, Special Forces, and joint headquarters units. He served in Iraq, Bosnia, Korea, and throughout the United States. He was awarded the Bronze Star, the Combat Infantryman’s Badge, the Meritorious Service Medal, the Special Forces Tab, and the Ranger Tab. In addition to teaching, he is a mid-level marketing executive and has worked in marketing and sales roles for various companies, including General Electric, Comcast, and Manugistics. He has been published in The Harvard Business Review blog, Business Week Online, Forbes, Christian Science Monitor, USA Today, and over 40 other publications. He has a BA from Northwestern University and an MBA from Georgetown University.

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