Budget Basics: Part 2

As I stated in Part 1 of this post, when you start your budget you want to over estimate on expenses, and under estimate on income. Of course, doing this will make your budget much smoother. If you end up spending just a little bit more than what your actual expenses are, then, it's not a big deal, and if you end up getting more income than you thought, well that is always a good thing, of course.

Step One: Figure Out Your Expenses

Make two columns, one titled "Expenses" and the other one "Income." Work with your expenses first. Make sure to include everything, including Christmas savings, car registration fees (both of these can be split into twelve months so you don't have to budget for everything right now), groceries, gas, car insurance, life insurance, etc. Sometimes you might forget about something and only know about it when it comes out of your checking account. Don't panic, just make sure you add it into your budget. Here are some tips:

• Over estimate on gas, groceries, electricity, and other things that can fluctuate. As the saying goes, "It's better to have too much than not enough."
• As stated in the first part of this post, the extra amounts will roll over in the YNAB categories each month to make a reserve for when expenses are a little more than previous months.
• Make a "blow fund" account for you and your spouse, if you are married. This account should be small (we only put $25 in each of our blow fund accounts every two weeks) if you are still in debt. I will discuss the function of this a little further down in this post.
• Don't forget maintenance/repairs! Make sure you allow for such expenses. It doesn't have to be too much at first, but make sure you do budget something for both categories. Some of the larger expenses (transmission goes out, furnace stops working) will be covered in your emergency fund (I will discuss this in another post), but the oil is going to need changed in the car, salt is going to need to be added to the softener, etc. You will have small repairs, so make sure you budget for these.

After all of your expenses are written down, move on to Step 2...

Step 2: Figure Out Your Income

This may be a little more difficult to figure out if you don't have a steady income. My husband gets paid a certain amount every two weeks, but he usually gets a bunch of overtime, so we aren't sure what his paychecks will be, but we make our expenses according to normal paychecks, not overtime paychecks (again, under estimate income). If he ends up getting overtime, we use the extra toward debt, savings, a nice meal out, etc. If he doesn't, our expenses are still covered.

If you work part-time and only get a few hours a week, try to figure out what the least amount of hours you will get will be (i.e., if you are supposed to get 15-25 hours a week, figure out your paycheck based on a 15 hour week). If you work full time, but your paychecks still fluctuate from month to month, take the least amount you would make.

Don't forget to add your spouses income, too. I will be honest here, I do not agree with spouses who separate their incomes (I will end it there). And if you do separate the incomes, it doesn't mean you can't have a decent budget. Just make sure you know what you have to cover and your spouse has to cover.

Once this is done, move on to Step 3...

Step 3: To Freak Out, Or Not Freak Out?

Take a deep breath. Let it out slowly! This is the part where many people start to freak out because they realize that their expenses are much more than their income per month, especially when you add in Christmas savings, heating savings, car registration, etc., stuff that isn't normally spent per month but now you are trying to save for so credit cards and savings accounts don't have to be drained later. How in the world are we living like this? you might be thinking. This is what is called living paycheck-to-paycheck, and a majority of Americans live like this, and the amount of income doesn't matter. There are people who make $30,000 a year who live like this, and people making $3,000,000 a year who do the same. One just has more stuff than the other. And you most likely realize this isn't healthy at all.... stress, lack of sleep, marital strain, etc., can all come from this life style, especially when an emergency happens, like an injury that might put you out of work, loss of a job, loss of a spouse, transmission or engine blowing, furnace breaking down, and several other scenarios. These things will happen, you can count on that.

The good news is you are taking a step in the right direction by planning out a budget. The budget is the most important step you will make for your financial future. Everything revolves around this... from how much you can give to charity to how much you can invest to how much you can spend tomorrow at Starbucks.

Take a few more deep breaths and move onto Step 4...

Step 4: Figuring Out How to Decrease Your Expenses and/or Increase Your Income

Decrease Expenses

The easiest part here would be to decrease your expenses, but it might take some sacrifice. Do you really need the cable/satellite? Or that expensive cell phone plan? Or that vehicle you may have just bought? Or the gas hog? You might be answering, "Yes," to all of these questions, but the truth is you really do not need any of those. They are wants, not needs. I'm going to give some examples of how to get your monthly expenses down in a later post because I don't want this one to get too long. I will say somethings are not pleasant to do, but cutting temporarily will allow you to be more comfortable when you can have it later.

I will make a separate post about this, but one thing I do want to stress is never go cheap on insurance. Always make sure your insurance is adequate. I'll name some of the things we've done to make sure we're adequately covered in a separate post.

Increase Income

This one may be a little more difficult. You can sell something, have a garage sale, work some overtime if your work offers it, get a temporary (yes, I will stress that) second job, change your withholding status, have your kids get summer jobs to pay for their own gas/insurance for those months, and I'm sure there are several other things you can do to increase your income, but again, the easiest thing to do is cut expenses. If you are unwilling to cut your expenses, then you'll most likely have to find a way to increase your income, so you can always brainstorm ideas. I will make a separate post that goes over this more in depth, too.

Hopefully after this step you will find your deficit (if you had one) much smaller or perhaps disappeared if you can just cut out a few things or increase your income. It is at this point that you can move onto the final step of setting up your budget.

Step 5: Using a Tool to Input and Maintain Your Budget

If you have been reading this blog, you know I am a strong supporter of a budget software called You Need A Budget (YNAB). It is, in my opinion, the best budgeting software out there. It doesn't mean there aren't others that are nice, too, but I still prefer YNAB. It combines the zero-based and envelope methods all into one program, and you can generate reports to track your progress. Here is a video... if you want to check out the 7 day free trial, click here.

The more you will learn about this program, the more you will love it. It teaches you real budgeting with the ultimate goal toward real financial freedom.

Of course, you can always make your own spreadsheets, but it is incredibly time consuming. It's also difficult to add and take away categories, especially factoring in all the calculations and things you need to add in every time. YNAB is easy. It's clean. It's, again in my opinion, the best resource out there.

You simply take the categories you don't need away, and enter the ones you do need in. Then you enter your account balances and start budgeting. And then congratulate yourself for taking such a big step toward financial independence: setting up your budget.

Of course, there will be more explanation in the next post specifically on maintaining your budget through YNAB.

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!