Not Exactly A How-to...

There are a number of elements that make generating a budget a tricky thing to get right. These are some things I wish I had known before I needed to make a budget. They're not really new, and I've seen or read most of them now, but it would have been super nice to have had them in mind before making our budget

Expenses

Keep track of every penny you spend.

Seriously. Do this first. If you like Excel*, now is the time to have a spreadsheet. Or have a little notepad in your pocket that you write every purchase in. Or get a receipt for everything. It doesn't matter a whole lot how you do it, but not in your head. You need to know exactly how much you spend and exactly what you spend it on. You need to be able to look back three months from now and tell me what you paid for toilet paper in May.

 *I bet you could make a cool database with Access too, but I've never really gotten into Access. I'm more of an Excel guy.

This is not about changing your spending habits. You can change them later. This is about know what your actual spending is.

Have you done that for a couple months? I think a year is ideal, but three months would probably serve our purposes almost as well. Mrs. Fund and I are pretty OCD about stuff, so we were doing this from the time we got married, before we ever had a budget, so we had about two years of data in our Excel spreadsheet to help us make an accurate budget. So do it for three months. At the end of each month, sit down with your notebook, or your pile of receipts, and sort out your numbers. Make categories based on what you spend money on. For example, I don't have a category in my budget for "Car payment" or "Cell phone"; but you might. The next month, do the same.

Got three months' worth of spending sorted out into categories? Good. Those categories will be line-items in your budget. You will likely also need to add some line-items for expenses that you only have once or twice per year-- taxes, insurance, Christmas, birthdays, etc. Be thorough and find every expenditure that's not monthly.

Now, about categories: don't make them so small that many purchases fit into more than one category. But make them specific enough that you know exactly what (and only what) goes into that category. For example, a lot of people have a "groceries" category, in which they put everything they purchase from the grocery store (from toothpaste to tomatoes); we specifically separate food items from personal care items, both of which we might buy at the grocery store. This allows us to more accurately estimate how much we spend on what, and adjust our budgeted amount if we need to. You may or may not need to, but at least think about whether you do.

Ready to make a budget? Make a list of the names of all your line-items. If some of them are exactly the same every month, then put that amount next to the category. If some of them aren't exactly the same every month, but only vary a little bit ($5 or less either way)-- our phone bill is like this, always about $25.71, but varying every month by about $0.25 due to tax fluctuations and/or fees changing, etc.-- then put down the highest number that it tends to be-- I allow $26 for ours, just to allow that little bit of wiggle room. This will leave you with your most fluctuative (is that even a word? It is now.) categories; for us, they're "household supplies", "food", "personal care", and, to a lesser extent, "gasoline". Don't expect that these categories will even be the same every month; but do know that overall they will average out to be something fairly steady. That overall average number is what you're shooting for. So take your three months of data for those categories and get a monthly average. Then think: is this lower than it would be at other times in the year? (I know our electric bill soars in the winter and plummets in the summer; a three month summer average would be terribly insufficient to cover the winter months.) If it is, make an educated guess of the difference and add that amount on. You can reduce it later if it's too high. If you're using a year's worth of data, you should be able to use that number without adjusting it much, if at all.

There you have a draft of your budget. I'm weird and like my budget to be an even, round number, so we rounded our budget up to the nearest $100-- if you do this, take that extra padding and put it into the categories that you think might need it.

Don't make your categories underfunded. I wish we had figured this out before we created our budget. It is WAY easier to reduce a category that consistently has too much than to try to dig a category out of the hole because it never has enough. You'll feel better about reducing an overfunded category, too. Like you just got some free money.

Okay. Tally up the total of all your budget line-items. This is your "budget". Hang onto this number. You'll need it in a minute.

Income

You need to know what your income is. If you have a normal job, you may not need to keep detailed track-- you should be able to look at your last year's worth of pay stubs. If you don't get all your income by paychecks, then you'll have to look at your own records, or start keeping them. Again, I think a year is ideal, but three months will probably work.

Did you count your net income or your gross income? If you counted net, then good. Your gross income doesn't matter. Let me say that again. You don't get to spend it, so your gross income doesn't matter. You need to budget based on the amount of income that you actually get to use.

Take your income numbers and do the math to find your average monthly income. Got it? This is what I will call your "income".

Look at your "income". Now look at your "budget". Look at your "income" again. Look at your "budget". If your "income" is greater than your "budget", then good. If your "budget" is larger than your "income", you will need to make adjustments to your budget and probably your lifestyle, because your hair is on fire*, as Mr. Money Mustache would say.

*This is assuming you are working something like full-time hours earning at least minimum wage. If you're not, then other advice applies. But your hair is still on fire.

Don't let your hair be on fire.

The Mortgage (The Budget, #1)

This is a first in a series-- I'll be going through each line-item in our $1,800 monthly budget, explaining and expounding the single number. That way you can see all the underlying factors that allow it to be what it is. Maybe by explaining each line, I'll even find some ways to streamline it even more than it is!

First up: The Mortgage.

We bought a fixer-upper house for just shy of $70,000. We got a sweet mortgage rate of 3%, and have been paying it off ever since. Yay.

290.06-- minimum payment
800.00-- current monthly payment.

We paid the minimum for about 6 months, then decided we might as well just pay an even $300. Then we decided we wanted to pay it off as soon as we could, and paid a $16,000 chunk of our savings towards the principal. At some point around then, I finally reached journeyman pay level at the grocery store ($15/hr, instead of the $10-11/hr I was earning before), and we decided we were going to put as much toward the principal as was reasonably feasible. After that $16k chunk, we started paying $750/month. We did that for a couple months, and then bumped it up to $800 per month in October of 2011.

Not a numbers person? See, here is a nice picture.

We currently owe $28,395.50 in principal, and we're hoping that we'll have enough saved up by early next year* to pay it off altogether.
*Namely, tax return time.

I will be super happy to see $800 more in free cash flow.

Making A Budget Is Hard.

Everyone says to make a budget. But hardly anybody says how difficult it really is. For instance, if you listen to the Dave Ramsey show, you'll hear him tell at least two or three people a day to make a budget.

"Sit down," he'll say, "write your income at the top of the paper, then subtract your most important expense, then your next most important expense, and so on until you get to zero. If you run out of expenses, then designate that surplus toward your debt snowball (if you have one, and almost all of his listeners do) or your savings."

See? Super easy.

Right.

As if you know exactly how much money you're going to have for the month, on the very first day of the month. As if you know exactly how much every little expense is going to be. A month ahead. As if you even know how much your larger expenses will be...Do you know how much you're going to spend on food this month? Yeah, me neither. Do you know how much your electricity bill will be when it shows up mid-month? Yeah, me neither. I know what my mortgage payment will be. There are a couple other small bills that I can know exactly, but most of my major bills are variable. By quite a bit.

THAT is what makes budgeting difficult. If you knew your income exactly, and you knew all your expenses exactly, you wouldn't need a budget. You'd have one-- the easiest budget ever.

Don't get your paycheck on the first of the month? That makes it trickier.

No worries. I'm here to tell you how it can be easy. Just use this one simple trick....It's not easy, so don't be deluded into thinking it is.

It's hard. What makes your budget difficult to create?

April Moneys

April is gone, and the results are in.

Incomewise, April was not nearly as good as March, but still not bad.

QFC:        $1,112
Domino's:    $872
Tips:           $881

Total:        $2,866

I always try to shoot for at least $1,980* which is my self-set minimum goal. All the extra counts, because it gets either saved or "invested"**.
*Yes, I know I already posted that my budget is only $1,800. I put away 10% of that amount for "purposes". I'll talk about it later, I'm sure.
**I don't have any investments in the normal sense. No stock, no bonds, no gold, etc. My plan for generating enough passive income to retire is to purchase real estate, to which end, I'm saving up for a down payment, which I should be able to do by next year, so I don't really want my money tied up in anything long-term for now. I consider the money/time/labour that I put into remodeling our current home an "investment" in making it into a profitable rental.

Spending was okay, I guess. I feel like we could have done better in some areas, and we did pretty good in others. Overall we were within the budget, so that's good. Some highlights:

Property taxes were due this month, so that's $635 that we don't normally have coming out of the bank. It's budgeted for within our $1,800, so there was no surprise there. It's actually much lower this year due to the fact that we asked the county to reassess our house because we felt it was overvalued. The county agreed and now our taxes are lower by about $12/month; $1,270 per year instead of $1,416.

I've been doing really well being miserly with gas in my pizza delivery vehicle, a 1996 Honda Civic hatchback. I actually registered 46.5 mpg last time I filled up. Only had to get gas four times-- once in the family car (1995 Civic), and three in the other. I try to make a tank of gas stretch at least a whole week of pizza delivery and commuting. Spent $137 on gas altogether. We're hoping to do a couple short trips over the summer, so I'm trying to make sure there's room in the budget for that.

We didn't have to spend anything on diapers, because we super-stocked up last month when Costco had a $5 off coupon. I hope we have enough to last 'til next time that coupon comes out. I think they alternate months.

It's been starting to get nicely warm, so our power bill is starting to drop, which is really nice. That budget account was $66 negative by the end of April, due to all the heating usage during the winter months. I'm looking forward to seeing it build up a positive balance over the summer.

We also spent $166 on stuff for our current remodeling project, which is the dining room. I consider this an investment in eventually being able to rent this house, so it's not part of the budget. In other news, the walls are drywalled and painted and it's starting to look like a real room instead of a work area. Next stage is the flooring.

The Budget, The Whole Budget, And Nothing But The Budget

How do I save money? I don't spend it. Except that I have to. So here's how.

Every month this is our budget:

$800-- Mortgage payment
$106-- Property Tax
  $55-- Homeowners Insurance
$275-- Utilities

$175-- Gasoline
  $65-- Auto Insurance
  $20-- Auto Maintenance
    $8-- Auto Licensing/Registration

  $69-- Household Supplies
  $60-- Food
  $40-- Clothes
  $15-- School Supplies
  $20-- Fun Activities

  $75-- Personal Care
  $17-- Life Insurance

$1,800-- Total

Any income over and above this total goes into savings.

The amounts have needed some tweaking over the last couple of years, as we continue to get a better estimate of what our average expenses in each category are. For example,  Gasoline was at $150/month, but we needed to increase that when I started delivering pizza.

Our budget works like the envelope system; the first day of every month, the budgeted amount is added to each category. Money not spent in previous months creates a surplus in its category; money spent over the budget creates a deficit that is taken out of the next month's allowance for that category.

More on how we make "budgeting" work in another post. Or two. Or maybe I'll just make a whole series going through each line-item. Stay tuned.