The Dreaded Budget

What is a Budget?

A budget is simply a list of your expected income and expenses. Used in advance, a budget allows you to plan out how you will spend your money for the coming week/month/year. This means you assign a purpose for your money ahead of time, (hopefully) eliminating the mysterious purchases that leave you wondering “where did my money go?” Used after the fact, a budget allows you to document your actual expenses. If done correctly, you can then use your actual expenses to update your projected expenses in a continuous refinement of your budget.

Why People Hate Budgets

It’s simple, really. Budgets seem restrictive. Nobody likes feeling restricted!

Following a budget means if you’ve already spent your designated entertainment budget for the month and you are invited to the movies with friends, the budget says “nope, sorry.”

You’re also supposed to track all of your expenses. You are going to be confronted with exactly how much you spend on golf, or fuel, or organic carrots each month. If you already have a relatively good idea of what you spend each month, this probably isn’t scary. But if you’ve never been through this exercise, you might be surprised and/or dismayed by what you find.

Using My Budget as a Spending Plan

What I wrote above doesn’t sound great. I know that. But that’s not how I view my budget.

Instead of seeing my budget as a restriction, I see it as a plan. It’s telling me “Here is what you are going to spend on (food/vacations/transportation).” It’s permission to spend. Granted, it’s permission to spend a certain amount, not anything I want. But since I’m using a budget I know all of my required expenses are covered, so I can spend guilt-free so long as I follow the budget.

When my budget says I have $4800 to spend on vacations this year I can spend that $4800 without worrying about whether I’m saving enough or paying off my mortgage on time. It’s already accounted for. It’s a very freeing feeling.

What A Budget Should Include

Your budget should include everything you expect to spend money on. That doesn’t mean you need to include a row by row breakdown of every burrito and beer. But, you might break out grocery store purchases and restaurant/bar purchases.

Note: there are times when tracking every penny on every individual purchase is a good thing, such as when you are determining your living expenses prior to retiring or trying to find money in your budget to use for investing or paying off debt. But it’s not necessary for everybody all the time. Do what you need to do right now.

Organizing a Budget

Typically a budget will be organized by category, then by individual line items. You might start with categories such as Housing & Utilities, Taxes, Transportation, Debt, Personal, Health Care, Children, Charity, etc. Then those will be broken down further. For instance, under Housing you may have:

• Rent/Mortgage
• Landscaping
• Storage Unit
• HOA fees
• Water/Sewer/Trash
• Electric
• Gas
• Cable/Internet
• Maintenance & Repairs
• Appliances & Furniture

Depending on how detailed you want to get, you might have a very basic budget that only contains 10-20 line items, or a very detailed one with 100 line items. It’s up to you.

Personally, I arrange my budget into the following categories: Housing & Utilities, Savings & Investments, and Daily Spending. Housing & Utilities and Savings & Investments are pretty self explanatory. Daily Spending covers all the little things that you might spend money on during the month – groceries, gifts, car repairs, pet expenses, etc. I don’t include Taxes, because those come out of my paycheck before I see it and I can’t control them (much). You might want to track it more carefully (I do track taxes in a separate area).

Many budgets will have more categories, but that is how mine has evolved over the years. I have 45 line items, although they are not all in use every year. For example, I have a line item for landscaping because some of my houses had yards with a lot of flora. I live in an apartment right now so that line item is currently zeroed out. I am actively using 29 of my 45 line items this year.

Rollover Budgets

Not every item will be a regular expense or have an equal cost each month. For instance, I spend far more on gifts in December than in January. And I might go two years without needing a car repair and then have a $800 bill. So I use a rollover method with my budget that allows me to “bank” unspent money for future expenses.

For instance, I’m not going to buy a couch every month. But if I predict I will want a new couch in 8 years, and that it will cost $1000 in current dollars, I would put $10.42 in the Appliance & Furniture line each month. That way, in 8 years I will have saved up enough to buy a couch.

$1000 / 8 years = $125

$125 / 12 months = $10.42

I’ll do the same for other expected Appliances & Furniture purchases and put the total amount away each month. If I don’t really have an idea how much each future expense will be, I’ll just pick a nice round number (like $100) and set that aside each month. This way, I have budgeted in advance even for the weird expenses that seem to pop up out of nowhere. I may not know exactly when I’ll purchase my next car or refrigerator, but I know I will eventually need to replace these items. With this method, the money is already there waiting for me, so I don’t go into debt due to a rare but predictable expense.

When I say I put the money aside each month, I mean that I send it to a savings account for irregular expenses such as car repairs, vacations, etc. I use Capital One 360 and have a separate sub account set up for a variety of line items.

Budgeting Software

If budgeting sounds like it’s not your cup of tea, or you don’t want to spend a lot of time on it, or you just like the simplicity of having one place to go instead of logging into each account separately, you might look into using budgeting software that tracks expenses for you. They are good for establishing a baseline that will allow you to develop a realistic spending plan. These programs will even tell you if you are overspending in a certain category. Personally, I’m a big fan of using plain ‘ole Excel spreadsheets for my budget. I like manually entering in the information because I feel more aware that way. But if you are looking for something a little more 21st century, here are some popular programs:

• Mint – free, easy to use, good basic budgeting tool. I don’t use Mint often, but it’s a good aggregation tool if I want to see a quick snapshot of my accounts.
• Quicken– costs money (usually $40-$110, but you can find sales), but has excellent connectivity to your financial accounts and great reports if you want to track your spending. Quicken is what I used when I was first getting control of my finances. Purchasing Quicken once will usually cover you for several years, but eventually they stop supporting the software. I think I was able to use mine for five years.
• You Need A Budget – this is the most expensive of the three ($50/year) and I haven’t tried it myself so I have no personal experience. However, people rave about this program. It’s considered especially good if you are bad at following budgets.

Do you have a budget? Do you like it?