Friday, July 3, 2009

Budgeting - our way of making it work.

I mentioned in a previous post that our budget was sort of an ever evolving process. I've been thinking about writing a post about how we budget, and since Kara asked about our sinking funds I figured this would be a good time.

Since I'm addicted to my computer and pretty proficient on Microsoft Excel, we keep our budget electronically. I've set up a spreadsheet that I just copy and paste before the month starts. Every month is different, which only makes sense. You have to plan for what is going on - if you are having a birthday party, you need to increase your food budget; if you are going to see relative, you probably need more gas. They key is to think ahead and plan for these things. You'd be surprised how quickly these little events can add up.

Income: I have a section of the page where we record our income. Usually we start the month with just Tim's paychecks - our FIXED income. I enter the dates he's getting paid and the usual total. This works because he has a consistent (within a penny or two) paycheck every two weeks. We've worked hard to keep our usual monthly expenses to a level where they can all be reasonably covered by just Tim's base salary. That way, we can be flexible with the other income we generate. Examples of other income include:
- Forward from the previous month*
- Payments I receive for my work
- FSA Reimbursements
- Reimburse work expenses
- Bonuses
- Gifts
- Sale of items (garage sale, e-bay, craig's list, etc.)
- Tax refund (when we used to have one)

* We budget down to the penny (zero sum), so any "left over" money at the end of the month either gets forward to cover expenses the next month (if it hasn't been re-appropriated to one of our sinking funds). For all these addition funds, we generally follow the method Dave outlines forirregular income planning. As we add the income throughout the month we can add more money to categories that need it (such as clothes, eating out, blow fund, etc.).

Expenses: In general, our budget categories tend to follow the ones outlined by Dave in the monthly cash flow plan. Obviously we've adjusted this over time to fit our typical expenses. I don't break it down by % or any thing like that; I just used the first column as a guide of how to break things down. In our second column we have what we average for each expense. This gives us a good base to work from each month. Our third column is our budgeted amount for that month, followed by our actual expenses, and finally our "remainder" so we know what we have left. This is why I love Excel. I have it set up to do all the adding and subtracting for me so I don't have to worry about it. I even have a page where I can enter all the daily transactions, which is set to total up and populate back to the main budget page automatically. I know that sounds geeky, but once it was set up it is SUPER easy to use.

In order to make things easier on ourselves, we put our gas and electric bill on the budget system so we have a consistent payment 11 months of the year. This has been a huge help. It took us a few months before we figured out what categories we needed and which ones we could do without. We've tried to simplify things as much as possible. For instance, our blow fund includes things like renting movies or golf, which some might classify as entertainment. Since we do it so infrequently, we didn't feel the need to have a separate category. Really, the key is to keep it simple, flexible, and find what works for you.

"Sinking Funds": Financial Peace University teaches you that you don't save or invest until you are debt free, but that doesn't mean you don't plan ahead. There are a lot of things that come up quarterly, semi-annually, or even annually that you have to plan for. We break these things, contributing a little each month, so we're not overwhelmed when the time comes. Our sinking funds include:
- Home owner dues
- Trash (pays quarterly)
- Recycling (pays quarterly)
- News Paper (pays every 13 weeks)
- Car insurance
- License/Taxes for car
- Term life insurance (pays semi-annually)
- Gifts
- Clothes

For the majority of these items, you simply figure out what you generally need or owe and divide it by the amount of time between payments. This seems silly for little items like the $13 news paper payment, but it was important to get in the habit of being prepared. Once you start paying of debts and have flexibility in your budget, you can change how you handle this but I think initially it's a good practice. Some people also may choose to have a separate category specifically for Christmas gifts, but we just group them in one.

We have a couple other expenses that would also fall in to the category of sinking funds:
- Home repair
- Car repair/replacement (cars don't last forever, or so I've been told)
- (and some day we will have a travel fund)

These last few categories are good places to allocate some of those flexible funds or any money left over at the end of each month (once your debt snowball is finished). One example of where it would become a more critical expense might be some thing like tires. If you know you need need tires, you need to save for them. We would set aside $50/month or add money from bonuses when we had it. Generally, I think the rule of thumb is that you need tires about every 2 years so you could also take the total (about $600 for 4 tires) and divide it among 24 months if you wanted to.

So... how do I track these? On my Excel sheet, of course, because I'm a nerd. I have a separate tab with all these categories. Across the top it has the last day of each month listed. When I'm finalizing my budget at the end of the month, I'll record any monies we've set aside in to the appropriate category. When we first started, I actually transferred the sum of all these monies in to a separate savings account because I didn't trust us not to spend them. We had been in the practice of seeing a large "balance" in our checking account and thinking we had all that money available. After about 6 months to a year, though, we had totally retrained our brains to only spend money listed on our budget spreadsheet (basically ignoring our balance in the bank). The envelope system would work well for these things also. I would recommend making a solid pledge to never dip in to the envelope, or possibly even store it in a safe or some place in the house that isn't easily accessible when that pizza craving strikes. Again, it's a matter of figuring out what works best for you.

Wow! Sorry, Kara. You're simple question turned in to a VERY LONG post, but it's hard to summarize some thing so detailed. I hope I at least answered the question. If not, let me know and I'll try to cut to the point next time.

BTW - I'd be happy to share my spreadsheet with any one who might want it but I've been told it's "complicated". I find it simple to use, but that's probably because I set it up.


Kara said...

Thank you! Seeing this all laid out and broken down category by category really helps!

And, thank you for posting to the forms, too. I have them in my TMMO book, but I know that others will benefit from them. It seems so simple with the forms, just breaking things down ... but sometimes we need someone else to point out the simple to us, you know what I mean?

You reminded me of a few categories - like HO dues - that Chris and I hadn't thought of for our sinking funds, too. I think we'll probably have to tinker a bit here and there as sinking funds are kind of a new idea for us, but I'm hoping they can save us some longterm heartache as we'll be better prepared for those expenses. We always know they are coming, but we've never really taken serious steps to prepare for them.

We're doing the envelope system as we tend to work better w/ cash, but I have noticed we're even doing better with that (well, for a few weeks so far) since using the envelopes you gave us with the balance sheets and Dave's steps on them. A good visual reminder every time I pull our cash out. Thank you!

Okay, wrote you a book! THANKS for this post! I'm loving this whole series you are doing and I bet others are, too!

Kara said...

PS - the fact that you guys paid off $85K+ in one year ... that just amazes me! And, makes me think that maybe our total debt isn't something we have to spend the next decade living with either LOL


Trish said...

My next question for you is how do you manage your bank accounts? We have checking at two different banks and a savings account at one. Are you moving money from checking (where I assume it's been deposited) to savings at the end of each month? That's my plan for right now, but I thought I'd ask what worked for you guys. :)

Happy Sunday!

Johnnal said...

okay, I would love to see your spreadsheets... I can't seem to figure out excell enough to work it all out myself, so having this headstart would be so helpful! Thanks for all the inspiration! We are on the envelope system, which works fine for me, but makes my husband crazy. It's nice to know that someone else was willing to break the rules to make it work for them and still live to tell that tale AND be DEBT FREE! WOW! WOW! WOW!

Anyhoo... If you would be willing to share I would really appreciate it. I have told everyone I know about you guys! REAL people, who REALLY did it! What a blessing!

TA-TA said...

Johnnal - If you send me an e-mail to amfurore at hotmail dot com with BUDGET FORM in the subject line, I'll reply with a copy of my excel sheet.

I looked on your page, but couldn't find an e-mail. THANKS for reading!


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