I talk a lot about budgeting, and at Sense To Save this week Kacie asks for people to explain the nuts and bolts of how they budget and how it works for them. I feel like the process of budgeting has had a really positive effect on my financial state of mind, as well as our progress towards our financial goals, so I jumped on the chance to expound on that. In my Budgeting for Dummies Series I have discussed methods of conceptualizing and creating a budget, but I’ve never really delved into my own preferred way of budgeting in any detail.
First off, I am a spreadsheet kind of budgeter through and through. Even before I started a more formalized budget where I tracked all of my income and expenses, I budgeted with a chart of my bills on a piece of paper. That’s what is comfortable to me. I don’t use a program that automatically uploads anything, because I feel like the process of entering the data myself helps give me insight on where my money went and how I spent it.
For my budgeting needs, I use PearBudget – but I am still using the old version that was spreadsheet-based. I have not tried the new version, and I know it is different. So I can’t yet recommend a specific program to use, with starting my tutoring job I honestly haven’t had time to play around with anything new and just recopied my old PearBudget spreadsheet to use for now. Basically what it is is a spreadsheet system but set up so it does a lot of the addition and other calculations for you. Again, I am a spreadsheet budgeter – I love to play around with numbers and crunch them.
A budget works for me in three ways:
- it shows me if my ideas about how much we need to spend in a month is realistic based on the amount of income we have coming in
- it causes me to track my spending in categories so I can see where my money really goes
- it allows me to have a plan to save up for irregular or emergency expenses
The basis of my budgeting method is that I have an overall plan for how much I need per month for a variety of categories via a list of categories and a dollar amount assigned to them, and then each month I do fine tuning to adjust for the variations that happen throughout the year in cash flow and expenses. I have a dollar amount every month for how much I think I will spend in certain categories. This is not how much I *aim* to spend, it is the maximum I am willing to spend, and I *aim* to spend as much less than the budgeted amount as possible. Once I have determined how much money I have coming in, and I assign it to categories, I know how much I should have left to put towards paying down our debt. And with a budget, if we have $3000 coming in each month, I can’t set up expenses like I have $4000. I need to make choices about my priorities and learn to be realistic about what I have. This is a key concept to successful budgeting.
I do have an overall “generic” budget per month based on our average monthly income. For example, I budget $130/month for gasoline. But every month at the beginning of the month, I go into that month’s spreadsheet and tweak the numbers if I need to. If I know we’ll be taking a long trip, I can up the gasoline budget and lower the utility budget. If I know we’ll be having company that I need to cook for, I can raise the grocery budget. The key is, with a tracking system, I can tweak but keep my eye on the fact that my overall spending does not go over the prescribed limit of what is coming in that month.
To save for irregular expenses such as annual bills or car maintenance, I budget a specific amount each month for these categories, and any money not spent each month gets carried over into next month’s budget, not snowflaked. So if I have $150/month budgeted for car maintenance and I spend $50, I carry over the $100 left and the next month, the amount available is $250. I do this both on paper and in my actual checking account. A budget is useless if it doesn’t reflect reality. In fact, I frequently check the value on my budget sheet for how much money I have left unspent against my bank balance to make sure they match. A budget grounds me in reality and that is a very good thing.
I aim to always increase the number available to snowflake to debt, and to do this, I need to find ways to spend less than I’ve budgeted in every recurring monthly category I can. As I come in under budget in categories, that money is now available for debt reduction and that is what it gets used for. No losing track of the small savings that happen month to month because I wasn’t paying enough attention. No more.
Without a budget, I never really knew how much money we still had available from what we spent, and a lot of my money got frittered away. The biggest revelation for me about a budget was the tracking of spending part. Once I started meticulously tracking my spending, it revealed to me places I could make changes and cut down what we had going out each month, as well as places I was losing track of savings and not putting them to good use.
Whatever the method is that works for you, be it automatic downloads and a web-based system, or a on your computer only spreadsheet-based one, I completely and truly recommend giving it a try. Understanding exactly how much money comes in and goes out has given me a feeling of power and control over my financial health I have quite honestly never had before. I can’t see myself ever going back to spending blindly and estimating in my head.