Financial — 23 November 2013

A simple way to describe budgeting is planning and recording all income and expenditures for a given time.  Dave Ramsey is a New York Times best-selling author and radio talk show host.  He is an advocate for putting strict regulations on yourself to curb your spending and pay off debt.  The number one step that Dave says is to set up a budget.  It needs to be “a Written…Comprehensive…New budget – every month.  If you don’t tell money what to do in a budget, it ‘leaves’.”  Suze Orman is also a New Your Times best-selling author who is also well known for her financial advice on CNBC-TV.  She has somewhat of a different perspective on budgeting.  Suze says, “Budgets are about as successful as fad diets where you lose a ton of weight at first then gain even more back. Big surprise. If you force yourself onto a strict budget, chances are you’ll never be able to stick with it, and you’ll end up with more debt than you started with.”

Dave&suze

It seems like there are two worlds of thought about budgeting.  Those who do it and those who don’t.

Living Paycheck to Paycheck

When I was a newlywed, my wife and I both were still going to college.  I also had a part time job.  I don’t remember the circumstances, but I wasn’t able to pick-up my check until a week later.  When I finally went in to get it, the lady asked me how I was able to make due without the money for a week.  I thought she was kidding, but she wasn’t.  She was really concerned that I was on the verge of starving.

I’ll try to tread lightly here because I know a lot of people (maybe even you) are in the situation of literally living paycheck to paycheck.  Many people are living through hard times right now.  Perhaps an unexpected medical cost or a market downturn has caused you to be in a situation where money is gone before you know it.

Thankfully, my wife and I have never been in a situation where we are writing bounced checks.  Early in our marriage we decided to follow Dave Ramsey’s advice of saving an emergency fund.  How did we do it?  You guessed it ….Budgeting.

Pay Yourself First

I’ve always heard that you need to “pay yourself first“.  I think I’m just starting to understand what this means and just how hard it is.  There are about a billion and one things under the sun that want your money.  There are probably a billion and one other things that you want to spend your money on.  Paying yourself is simply putting aside a part of your income to saving (for retirement or emergency fund) before you spend on anything else.  How do you keep track of paying yourself?  You guessed it…Budgeting.

My Approach to Budgeting

Part of having financial freedom is to not constantly worry about a budget.  Then again, part of financial freedom is knowing how and where your money is spent.  We don’t budget with an iron fist, but we do try to set realistic goals and stick to them.

Sorry Suze, I’m an engineer, and I have a gnarly spreadsheet.  A spreadsheet simplifies my life. This may not be the best for everybody’s situation (especially if you don’t like spreadsheets), but you can use the same concepts to make a budget with regular old pen and paper.

Step 1 Write down all your income categories

We make a new budget each month.  You may consider a different planning period (such as bi-weekly or quarterly) depending on your preference.  Write down your income from the last planning period (i.e. last month).  We use our gross income so it includes our contributions to things like 401K and health insurance.  We realize we never really “hold” this pre-tax direct deposit money in my hand, but it helps us keep track of what income we do receive and where it goes.  Even though we do include the money we pay into our 401K, we don’t include the income from interest on our 401K since we can’t spend any of that money right now.

We do include interest that we earn of saving and checking accounts.

Step 2 Make a list of expense categories

We actually have a broad categories list and a sub-categories list.  For example under the category “Home” we have sub-categories of “Garbage”, “Mortgage”, and “Sewer/Water”.  It isn’t necessary to make a categories and sub-categories list, just do whatever seems to make sense to you.  What different areas is your money going this month?

month budget_

Step 3 Distribute all of your income to the listed expense categories

Now comes the fun(?) part.  You assign money to each category.  Every cent from the last months income (see step one) should be assigned to a category for this month.  There is no such thing as “left overs”.  Every dollar goes to a category.  You need to be as realistic as possible about how much you need for each expense.  This shouldn’t be based on wishful thinking alone.  I’ve learned that over time, we have become better at estimating our expenses.

We try and think proactively about expenses.  For example in the picture above, we have $40 put in the budget for irrigation.  In October we didn’t spend anything on irrigation, but we know that if we save $40 a month we will have enough to pay our irrigation bill when it comes.

Step 4 Keep track of your expenses

A budget is pretty useless in my opinion if the actual expenses aren’t kept track of.  It isn’t that hard to do.  If you use a debit or credit card, your monthly statement will show where your money is going.  You simply have to assign your expenses to the categories you made in step 2.

We keep track of receipts.  I’ll admit it is a little bit of a nuisance, but it’s often needed to split out expenses into different categories.  Keeping receipts also helps to double check credit card charges.

budget_register_

In our spreadsheet I have a tab named “register” that I use to keep track of the date, amount, description, and sub category for each expense.  To help me in the task of keeping track of things, I download the statements from the bank and put them in the spreadsheet.  The spreadsheet automatically sums and puts the expenses from each category for each budget planning period.  This is where a spreadsheet is very useful at saving us a lot of time.  This amount is reported in the “spent” column shown in the snapshot shown in step 2.

Step 4 Make an envelope to keep track of your money in each category

At the end of the month you can see how much was spent versus how much was budgeted.  Undoubtedly the expenses will not match the budget exactly.  If we are overspending in a category it will show.    Here is where ruling the budget with an iron fist comes in.  Some say it is best to only spend the exact amount that you have budgeted.  Dave Ramsey recommends carrying cash and only spending the exact amount put into the budget.  I see the wisdom in that recommendation, but I don’t like to sweat the small things.  The way I see it, the family budget should be my tool and not my constant nightmare.  The bottom line is to make sure that overall you are not “pulling out” more than what you are “putting in”.

The “envelope” is a virtual savings account that keeps track of how much we have in each category.  If we put more into our budget than we took out this month, the envelope money carries over to the next month.  This allows us to plan for future expenses and see our progress.  It also allows a little bit of a buffer for unexpected expenses.  If the envelope has a negative value, more money will need to be budgeted the next month in order to bring it out of the hole (see “Fitness Club” in the step 2 snapshot).

Final Thoughts

There you have it.  My budgeting plan in four steps.  I hope this helps you to manage your family budget.  This has been a great help for my wife and I as we are planning and keeping track of our expenses.  It has helped us be a little more financially self-reliant and avoid living paycheck to paycheck.  I would love to hear what has helped you in your financial Antireliant pursuits.

 

This article was written as part of the Financial Master Plan Antireliant Project my family is working on this month.

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Ben

(6) Readers Comments

  1. I think Dave and Suze both make good points, and it depends on where you are in your financial situation. If you’re just starting out, I like Suze’s approach, which tends not to scare off newbies. To me, Dave is for when you really want to get serious. We keep a budget in Quicken, which makes it so easy for us to track our spending. Granted there is still work to be done categorizing, but the automatic downloads of our checking and credit card makes our lives so much easier. Thanks for sharing this post! I’m doing a minimalist holiday series, and your points were helpful to me for the budgeting portion of the series.

    • There is no question if you are determined and serious about getting financially fit, Ramsey is the man for you.

  2. I also follow Dave Ramsey’s approach and it has been working well for us. I have to mention that while Dave says “Make a budget and don’t spend anything anywhere that is not in the budget”, it is not as restricting as it sounds. He says some people create a section of their budget that is strictly for Target (or other favorite store). They can spend freely from the money allocated to that part of the budget, but nothing more.

    If you are in serious debt, allocating portions of your budget for free-spending at Target is probably not a good idea, but the point is a budget is only as restricting as you make it. The key is to not allocate more money going out than you have coming in and actually sticking to the budget.

    • Totally agree!

    • Hi Trish. Although I share Dave Ramsey’s philosophy of not spending more than you make, I do not follow his advice on some things. For example he says to carry and pay cash for everything. Instead of a virtual “envelope” like I have, he wants you to use a real envelope of cash. For example if you budgeted $150 for groceries this month, you would have $150 of cash in an envelope devoted for groceries. If you went to the store to buy your turkey dinner, and the cash register rang up $152.34 you would have to put the stuffing back on the shelf.
      I would rather spend the extra $2.34, and make up the difference in the budget next month. I’m not a big fan of carrying all that cash either. For me a debit card is much more convenient.

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