June 23, 2014

Budgeting Simplified

If I've managed to convince you to TRY budgeting, you're probably wondering where to start.

Keep it simple. 

Start with just a few categories, then break them down into smaller categories as you find it's necessary/helpful

If you've never budgeted before, start tracking how much you spend in each of your predetermined categories. Next use the amount you're currently spending to determine an appropriate budget for those categories.

There are many ways to budget, try one, if it doesn't work, try another one.
In the last 8 years, I've used 6 Budgeting Methods. 

If needed, try a combination of methods.

There are 4 main components to a budget:

1.  Fixed Expenses: The things that don't change (or don't change often)
This may (or may not) include:
Auto Insurance
Health Insurance (If you pay for it yourself)
Life Insurance
Cell Phones
Spending Money

2. Variable Expenses
Gas (Heat)
Home Improvement
Charitable Contributions
Auto Insurance
Gas (Car)

3. Irregular Expenses
Medical Expenses
Auto Service and Parts
Car Registration
Home Repairs
School Related Expenses

4. Goals/Savings
Emergency Fund
New Vehicles
Down Payment on a Home

This may be a fixed expense if it's a mortgage or car payment, or in variable expense if it's credit card payment or Home Equity Line of Credit that fluctuates. It may show up in your goals category if you are trying to get debt paid off, or it may not be part of your budget at all [insert virtual applause here!]

Budgeting seems simple, estimate your monthly income, estimate your monthly expenses, designate how much income should go to each expense then adjust the allotted amount until all your categories fit within your income.

So why isn't it simple?

What makes Budgeting difficult for you?

The difficulty of budgeting typically stems from one (or more) of three difficulties:

Irregular Expenses like car registrations, birthdays, swim lessons, soccer, school clothes, Christmas, auto insurance, oil changes, tuition, on and on, it can seem impossible.
Surprise Expenses/Emergencies: a car breaks down, the water heater dies, broken bones, chipped teeth...
The Budgeting Method you're using just doesn't work for you.

Here are some possible solutions:

Irregular Expenses
Write down all those expenses and the amount you expect to spend on them.
It might be easier to remember them all if you list them by month

Here's an example:
  Birthday               $XX

  Birthday                $XX
  Valentine's Day     $XX
  Birthday                $XX

  Birthday                $XX
  Birthday                $XX

  Car #1 Reg.           $XXX

  Mother's Day        $XX

  Father's Day          $XX

Then add all the expenses up and divide the total by 12(months).
This is the amount you will need to put away each month(either build it up in your checking account or open a separate savings account for just this money) to cover those irregular expenses.
There is a great FREE website that will do this electronically:
Try it out and see if it helps you keep your budget on track.

Start building an emergency fund. The typical recommendation is 3-6 months of expenses, but if you don't have anything I recommend starting with a goal of a 1 month emergency fund.
By saving 10% of your income every month, after 10 months you will have acquired a 1 month emergency fund. However your income is probably more than your basic necessary expenses so really by saving 10% for 10 months, or 5% for 20 months, you'll have surpassed your goal, especially when you add in earned interest.
[Speaking of interest, we all know that interest rates are low right now, great if you're a borrower, not so great when you're trying to save. Try opening an online/high yield savings account for a slightly better interest rate, it also makes your money slightly less accessible (it typically takes 2-3 days for funds to transfer to your checking account) so you're more likely to only use that money in an emergency. Some companies that offer High Yield Savings Accounts include HSBC, American Express, ING, and Ally]                                    
***This is not an endorsement for any particular bank, compare interest rates and policies to decide if one of these accounts works for your situation.
Establishing an emergency fund will protect your budget from hardships such as car repairs, home repairs, or job loss.

Budgeting Method:
If your budgeting method is too complicated, confusing, time consuming, or overly confining, chances are you'll fail. There is no one budgeting option that will work for everyone, and just because you find one that works now, doesn't mean it will always work for you. If it doesn't work, try another option.
I'll address budgeting methods more in depth in another post, but for now here are 2 ideas to try:

The Envelope Method is a great, simple way to start budgeting. It's visual and it's easy.
1. Gather a stack of envelopes (one for each budgeting category)
2. Write the name of each category on an envelope
3. Fill each envelope with the amount of money you've budgeted for that category.
4. At the end of the month or pay period, however you decide to budget, you can save what's left or leave it in the envelope to rollover to the next month.
            If you prefer to buy a  professional envelope system, Amazon has a couple of great options here and here.

Mint.com is a free, and quite user friendly, online option.
I currently use Mint.com to manage my budget online.
Mint automatically pulls all of my credit card transactions and allows me to easily categorize those transactions so I always know where I stand within each Budget Category.

1 comment:

  1. When my kids were young it really helped me to have 2 savings accounts, one for long term, and one for those irregular expenses. If the money I was saving for them stayed in my checking account it was too easy to spend it. Keeping it in a separate savings account worked for me.