Tuesday, May 27, 2014
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
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.
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.