Budgeting 101: How to Plan When You’re Cutting it Close

You don’t have to raise your hand….but I’m pretty sure most people have, at some point in their lives, been in financial crisis.  When you’re at the point where technically you make enough in a month to cover all expenses, but you cross your fingers and toes that your income will hit the bank account BEFORE your expenses do.

Remember that?

Alright, THAT is what we’re planning for in this post.  If you have $10,000 in the bank account, and $2,000 of expenses hitting in the month, this level of planning is completely beyond what you should be worrying about.  The one exception I could think of is if you keep your money in one account, and pay bills from another, and need to make sure that you’re transferring the correct amount to the “bill paying” account in time for the cash to clear before the bills do.

(I worked with a girl once who, I swear, spent hours on the phone every week talking with her bank trying to get cash from one account to another in time to not overdraft.  She had it down to the penny and down to the day, it seemed.)

What you’re going to do is make a very, very simple Excel spreadsheet.  If you don’t have Excel (or a similar spreadsheet program) you can sign up for Google Docs online, and use their spreadsheet maker.  It’s limited in function, but will meet your needs admirably AND be viewable/editable by your spouse, etc.

Open a new spreadsheet, and save it.  Make it something clever, like “Budget Spreadsheet.”

In line one, column A write “Date.”  Column B, write “Income”.  Column C, write “Expense.”  Column D, write “Total.”

In line two, column A, write today’s date.  In column D write your current bank account total.

Now, click once on cell A2 (column A, line two) so that the cell is selected (outlined in bold black lines.  Yes, I know I’m being simplistic- if you don’t need this level of detail, just bear with us!)  Hover your cursor over the bottom right corner of the cell until it becomes a plus sign, click and hold, and drag your cursor down the page.  You should see the date increasing in the subsequent cells.  If you’re in Excel, it will be smart enough to know from just one date.  If you’re in another program, you might have to write today’s date AND then tomorrow’s date in the cell below, select both cells by hitting shift+down arrow, and then dragging from the bottom right corner so that the program knows you want a continuation of that same date pattern, rather than just copying down the date in the first cell.  Drag as far as you want- I like to go 3 or 4 months, or up to a year.

In cell D3, type this formula (without the quote marks!)  “=D2+B3-C3”  What you’ve just said is “take yesterdays balance, and add today’s income and expenses.”  The “equals” sign shows the program that you want this to be a formula.  A plus sign is also a way to show you want it to be an equation.  Hit enter to leave that cell, then click on it once to select.  Hover your cursor over the bottom right corner, and click and hold, then drag down until you reach the last line you dragged a date to.  Each subsequent cell will now pick up the total from the day above it, and add/subtract the current day’s income and expense.

OK?  I promise, this is about 3 minutes worth of work- it just takes a lot of words!

All that’s left is to type in all known expenses and incomes, on the appropriate days.  I use column E to write a short description of the income and expense.  For example, if the September 20th line has income AND expense, the cell in column E might say “piano income/utilities.”   I know when I expect to visit the bank to deposit all my piano tuition checks, so I’ll enter that information for every month.  I know when to expect my husband to bring home a pay check, so I’ll enter that in all the months.  I know when my mortgage, credit card bill, health insurance, church tithing, and utilities are all due, so I’ll input those for all the months with estimates of what they’ll be.  Some are easy, because they’re constant (like health insurance and mortgage.)  Others are subjective (like utilities and tithing), and I’ll put in my best estimate.

This kind of budget does not allow for padding and extras- if an unforeseen expense comes up, you’ll have to add it in, and watch your future balances.  The point here is to put in all the income and expenses you know of, and then scan column D.  Does it ever go negative?  That means on the day the expense in that line clears, you don’t have enough cash.  Bummer.

BUT, now you know, and you can try your best to do something about it.  Can you make a little extra cash before then?  Can you be a bit more frugal and lower some expenses?  Check the bill due date, and see if it’s possible to pay it closer to the due date if you’ll have the cash by then?  Budgets are all about knowing and planning, even when the news isn’t good.

Does column D stay positive?  If it’s close to zero, watch out!  If it never gets close to zero…congratulations.  You have a balanced budget, now please be careful with it.  🙂

Budgeting 101: Planning for Large Expenses

Alright!  In part one we talked about tracking your expenses.  You know exactly what you’re bringing home, you know exactly what you’re spending- there might have been a few surprises along the way, but you have a framework to work from.

The next step is to write down any known, large, “lump” expenses you’ll have in the coming year, and when they’ll happen.  Examples:

  • Property tax payments
  • Income tax payments (quarterly, if applicable)
  • Medical bills for known procedures (births, surgeries, etc.)
  • Lump insurance payments (life, car, house, rental, etc.)
  • Tuition
  • Deferred payments (If you purchased something on credit and deferred payments)

You have two choices when it comes to budgeting for these expenses: lump or amortize.  Ooh, big words, but it’s easy!

If you are setting up your budget in mint.com, or on a spreadsheet, you can either plug these amounts in the month they’ll be due (lump sum) OR you can set aside small amounts every month to save up for them (amortize).  Mint will allow you to do either.  The money will still be in your bank account (or you could transfer it to an attached savings account monthly) but it will be COMPLETELY OFF LIMITS TO YOU.  Consider it spent and gone from the moment you set it aside.

One more lump sum to consider budgeting for is a new car.  My husband’s grandfather purchased a new car every 5 years, and would keep each car for 10 years.  During that 10 year life of the car, he would set aside an amount every month to purchase a new one, and part of his calculations was based on miles driven.  The IRS assumes that cars cost $0.50 per mile to drive, and that’s not far off the truth.  Driving is far more expensive than gas alone- wear and tear on the car, maintenance needed, parts, etc.  Please factor these numbers in your calculations when planning a trip, for example, before deciding that driving would be cheaper than flying.  Depending on the number of people you’re traveling with, flying (or some other transportation) might be cheaper!  Of course, if you’re able to find a good deal on a rental car for cheaper than you could drive your own AND cheaper than other transportations, AND there’s no mileage restrictions?  Have fun!  (Can you tell I dream of renting a minivan and taking off with the family?)

Consider budgeting $0.50 per mile driven in a month to pay for upcoming maintenance, and then an amount additional to that if it’s time to save up for a new car.

Whew!  OK, to recap:

  • Track your income and expenses religiously, and don’t you dare fudge or rationalize.
  • Write down all known large expenses coming up, and decide if you’ll budget for those as lump sums or set aside a small amount every month.
  • Cars aren’t cheap.

Budgeting 101: Start Tracking

Let’s start the budgeting series!  We’ll just see where this goes, but I’m excited to get a discussion started.  Money is one of the toughest subjects for spouses to discuss (although, a practicing family counselor once told me that sex is the most common root reason for divorce, although couples won’t say it.)  Budgets are not an emotional issue, especially when you sit down to start one.

First, a budget needs to reflect your household’s needs and wants.  Figure out what you’re spending, RIGHT NOW.  Our favorite way to do this is mint.com.  It’s a completely free website that will link to your transactions, such as credit cards, checking and savings bank accounts, and large financial institutions like Charles Schwab, Morgan Stanley, and the like.  Track your spending for a month or two, and make sure to carefully label transactions.  If you go to the grocery store and spend $100, but $60 of that is spent on diapers and soap, label those dollars amounts appropriately within the transaction so you can see your true food cost for that trip, and the true cost of diapers and soap.  I normally log on once a week or so to label transactions and check to see which charges and checks have come through, and to make sure there are no bogus charges.  (We had some troubles with magazines and gym memberships earlier this year that would NOT stop charging us.  We worked it out, but I was glad I remembered to check and stay on top of things.)

I prefer to shop almost exclusively with plastic cards, so I can easily track my spending.  Paper money is too hard for me keep track of, and too difficult to handle in a store when I’m with my little ones.  If you’re concerned about the temptation of using a credit card to excess, use your debit card.  But this is just what works for me.  We have always paid off our credit card monthly, and debt has never been a temptation, so this works for us.

One you’ve tracked your purchases for a month or two, and your incomes, you’re ready to sit down and see what patterns come out.  How much do you spend on food, restaurants, gasoline, services like hair cuts and nails, utilities, etc.  How much do you spend on hobbies and charitable donations?  Remember, there is zero emotion in this process- you may wish you hadn’t spent $50 a week on cookies, but for right now that doesn’t matter.  You spent what you spent, and what you’re looking at right now is a base-line of what your family spends AND makes.

I’m going to talk more about tracking grocery purchases later, but for now we’ll just assume that all groceries are created equal and track your total expenses.  I’ll include farmer’s markets, co-ops, etc. in this category, but you can delineate however works best for you.

If wages and income are not salaried, or are regularly spent before being brought home, you might find some surprises in your income.  Here are some examples:

  • With my piano studio let’s pretend I should be making $1,000 a month and plan my expenses accordingly.  However, when I look at my records I realize I’m only bringing home $600 a month on average due to cancellations.
  • I work at a clothing store and based on my hours should be bringing home that same $1,000 per month, but am purchasing at LEAST a shirt every week and only bring home $700.
  • I work nights at a grocery store and purchase dinner every night at the deli, and end up bringing home only $800.
  • When my husband was at his previous employer, certain expenses could be taken out of his paycheck such as group purchase tickets to shows and games, postage for packages mailed by the mail room, etc.

Make sure you keep track of spending before AND after you bring your money home!

Just remember- nothing in this process right now is emotional.  You are only learning your true income and your true expenses.  If you spend $2,000 a month on fancy restaurant meals, so be it.  Know that expenses and income will vary throughout the year- you can update your budget later if you need to.  For example, utilities are traditionally lower in the summer (unless you regularly water your lawn, for example) and so I can normally budget at least $100 lower for utilities June through September or October.  If it’s easier for you to budget a yearly “average” number, and use a budget that allows unused dollars in a category to be included in the available budget for that category in the next month, that’s fine.  I prefer to update it when things change, so we can try and be as close to budget as possible every month.

Are you still with me?  Go, track your expenses, and next up: setting up the budget!

Budgeting….on a Budget

I’ve had this idea rolling around in my head, PROBABLY because my budget has been rolling around in my head more than usual lately.

I thought, if there was interest, we could do a little series on budgeting and household finances and stuff.  Yes?  No?  Major yawn?

I’m actually hoping it will be collaborative.  I’ve gotten stuck in our household budget- try as I might, I’m not seeing many more places to trim and squeeze.  And OH how I love to trim and squeeze.  You have no idea how much joy I get out of NOT purchasing and NOT shopping.  I loathe malls.  I detest parking lots.  And checkout clerks…well, I don’t carry cash with me for shopping, because that would increase my interaction with the clerks, and I already get a little ringing in my ears just swiping my card through the machine.  *

I’m not a people person, OK?

Over the last couple years I’ve developed a system that works quite well for my family finances- spreadsheets, websites, etc.  My husband and I are both accountants, and extreme spreadsheet geeks.  I adore spreadsheets as much as I…don’t adore the perky “Hello!  How can I help you today!  Are you finding everything OK!” girls.  You know exactly who I’m talking about, don’t you?

SO.  To start this party off.

What does your family do to save money?  Are you interested in learning more ways to shave down your budget?  How do you keep track of everything, or do you shut your eyes and *hope* every time you run your card through the machine?

*YES.  We pay off our balance every month.  I’m not about to pay double or triple my original balance to a credit card company!  Besides- if we pay off our balance every month, they send us a check once a year.  And who doesn’t love a nice fat check?