Budget Basics: Part 1

This post is going to focus on the basics of budgeting. When you set up a budget you want to always over estimate your expenses, and under estimate your income. This probably seems fairly logical, but it is necessary to point out. You will also need a method for keeping track of your expenditures and income(s). While I am sure there are several "methods" for keeping track of a budget, I am going to go over the ones I use because out of everything we have tried, we believe it's by far the best way to make an awesome budget.

Don't Be Overwhelmed

Starting off it can be a bit scary, especially if you find out you have more going out than coming in. It's OK, but the goal, obviously, is to make it the opposite. Don't expect to start out making a perfect budget, either. There will be times when you overspend, and that is OK, but focus on not making it a habit. There will be times when you forget and get behind, and that is also OK, just focus on being more consistent.

I recommend (and I believe YNAB does as well) working on your budget every single day (the first day will take the longest) for about two weeks because it will become more of a habit. Now, some days will only take a few minutes to input transactions, and others will take longer when you have more bills to pay. After the two week period, drop it down to a couple days a week, then maybe one day a week. I personally work on our budget about every 3-4 days so I don't get too behind, and so I don't have to make it an all-day event. Consistency at managing your budget is important, but don't fret if you get too far behind, just do what you can to catch up.

Zero-Based Budgeting

This blog will use the zero-based budget model, which is wonderfully demonstrated using the YNAB software. I want to start off by first saying that looking at your checkbook balance is not an efficient way to budget. Sure you might have some money in there, but a checking account balance is so misleading, especially if you forget about a bill that is due, or if you are not good at keeping a balanced register with you at all times. Also, if you have ever had your heart sink after checking your account balance and realizing you spent much more than you thought you did, you will also understand why this is not a great method of budgeting.

The zero-based budgeting method basically takes your checking account balance and separates it into categories so every dollar has an assignment. Now, instead of looking at your checking account, you will look at your category balance. Let me give you an example: Let's say you have $1,000 in your checking account right now, and since you are a seasoned budgeter (and you will get there), you have assigned your dollars to sit and wait for specific functions. So your budget may look similar to this:

Car Payment: $200

Gas: $200

Groceries: $200

Restaurants: $70

Christmas: $100

Blow Fund: $50

Car Registrations: $180

If you added up all of those categories, they equal $1,000, which is exactly what your checking account balance shows. Instead of randomly going out and making a large purchase because you just looked at your checking account balance, you have a category balance to spend from. So, if you need groceries, you know you have $200 to work with, not a full $1,000. The same for restaurants. If you want to go out for a nice dinner, you have $70 to work with, not $1,000.

This will help you not only save for larger purchases in the future, but also help with over spending... and because of this method, your checking account balance will continue to keep growing, yet every single dollar will be accounted for by your budget categories. That is the zero-based method.

Envelope System Method

Another great feature of YNAB is the use of a sort of "envelope" system. The envelope system was sort of explained in the last section. Many financial gurus recommend this system because by setting up envelopes for each area of your budget, you assign what you have to spend to each envelope, and can only spend that amount. If you look back at the example of the budget in the last section, the "envelope" would be considered the different categories, (i.e., Car Payment, Gas, Groceries, Restaurants, Christmas, Blow Fund, and Car Registration). Each envelope gets a set amount per month (or per paycheck if you're just starting out in your budget), and that is all you have available to spend for either the month or the pay period. The great things about the envelope system is what is left in the envelope carries over to the next month.

YNAB uses a sort-of digital envelope system, where the envelopes have what you have budgeted, what you have spent, and the balance of each "envelope" (which we will call category from now on). Whatever is left goes into the category balance for the next month. This is great for saving for things like Christmas, a new car, car repairs, house repairs, gas, groceries, etc., and it's best to let certain categories roll-over each month, yet add the same amount that you want to budget right back in each month as well. I'll give you an example.

Let's say you have $300 a month budgeted for gas, but you only spend $200. Your category balance will be $100. I recommend adding $300 again the next month so your starting balance is now $400 instead of the normal $300. Vacations, summer time trips, unexpected family hospitalizations, etc., usually all happen. If you let your extra roll over each month, yet keep budgeting the same, you will have a reserve set aside for gas just in case something unexpected happens, or if you want to have the extra to go on a vacation or a day trip somewhere. If you budgeted $300 every month, yet only spent $200 for 6 months, you will have $600 in your gas reserve by the 6th month, plus the $300 new budgeted amount, making your gas balance a whopping $900. (Can you see how your checkbook balance will grow now?)

I recommend allowing this roll over for several other categories like the following:

• Groceries: Most people have cookouts, camping trips, and other activities in the summer, as well as holidays and family meals in the winter. It's nice to have the extra money left in reserve to make up for these events, or when there is a meat or canned good stock up sale.
• Electricity: For most people, the electric bill is much more during the summer than in the winter. We usually pay about $150 in the summer (depending) and about $100 in the winter, so we try to budget $130 all year long. While in the winter, our category balance rolls over each month to make up for the extra spent during the summer later on.
• Christmas: This method works great for saving for big holidays like Christmas. If you set your budget in the beginning of each year you just divide by 12, then save that amount per month and let it roll over until December. It's pretty simple, really.

Those are just three that came to mind right away, but I'm sure you can find several more. There are, however, certain times where you can adjust your budget amount according to what you spent, so one month you may budget less than you did another month. This may sound confusing, so I'll give you an example that just happened recently with us.

Our Internet bill is straight up $50. Not $51.45, just $50. So, I budget every month for $50 exactly. Because we recommended a few people to the service, we got $30 knocked off our bill for this month, so our bill was $20. I had two choices: either I could leave the $30 in that category to roll over to next month, or I could just drop by budgeted amount by $30 for the month. So, basically it was either save $30 this month or next month. I decided to save it this month to add to something else to get some of our debt paid down. In this case, it isn't necessary to just keep the $30 in the category balance and add $50 next month to make the balance $80. Since we have great Internet service, our bill is never higher, and it isn't a debt, so it's not like I could use the extra to pay that bill down. In these cases, you can just take the $30 out of your budget for this month, or only budget $20 extra for next month.

All I am trying to say with this is there are some things you want to roll over each month, but some things aren't necessary, and you will learn what you should or shouldn't let roll over. It won't be perfect right away! When I first started to budget, I probably would've rolled over all of my categories, but if you still have debt, you want to pick and choose what you want to roll over and what you don't. There's no need in rolling over the things that are not necessary if you can use the extra to help get out of debt (I will give methods on debt management and pay off in another blog post later).

I will end this post now, and tomorrow I hope to post Part 2. Please feel free to comment or e-mail if you are confused about anything. Sometime's it's hard to visualize something through typed words!