I mentioned earlier that I was fabulous at budgeting. I don’t think it’s very fair to say that and then not share how I actually budget. This is something that has literally changed our lives and only for the better. I spent a lot of time thinking about budgeting and trying to understand it before I ever launched into it myself. And I hated the idea.
“So confining,” I would say.
“I couldn’t handle that kind of restriction.”
“I don’t want to have to limit myself.”
“What if something is on sale but I’m out of budget money? I doesn’t make sense to not buy it while I can get a great deal!”
Plus about a million similar concerns. Ever thought any of those things? Yeah, I’m here to help. This concept was different than all the others I ever found. It has some similarities to the envelope budgeting system but I track it all on paper rather than physically putting the cash into envelopes. We always buy everything with a credit card to earn money back (and then pay it off immediately) so we prefer money in our bank account.
After helping someone set up their own budget recently, I realized my system is based on the foundation that “Savings” is a swear word.
Who says that right? I do and here’s why. “Savings” tends to be a lump sum of money without any particular future destination. You “save” money when you are able in order to spend it on whatever happens to come up later. It could be for “emergencies” or for unexpected expenses or for great sales or for unemployment or for any number of things. It can easily be spent because it isn’t reserved for any particular reason. What I do instead is specify every “account” I put money into. This will vary for everyone but naming them and deciding on their exact monthly, weekly, yearly (whatever works for you) contribution will keep you from spending your health insurance deductible on a case lot sale, without at least realizing you are doing it first. I still save but I will never have a “savings.”
Disclaimer: Before going further, I need to specify, I have never had to budget on a fluctuating income. While I’ve adjusted our budget 3 times due to raises or job changes, I have never budgeted where every month is a different amount such as with a commission job. I’m sure this could somehow be adapted for that but I don’t know how because I’ve never done it. If you try it and it works I would LOVE to hear about it.
I will provide some pictures of my exact budget (real numbers included) as well as the process of how I helped someone else create her own budget. The beauty of this, if it is done right, is that you only have to have one paycheck to live the whole month. No juggling or dipping into “savings” to pay bills. It covers all of your costs for every month with the amount of money you make every month. And if it doesn’t, sadly, you must change. But don’t fret about that just yet. We’ll talk about that at the end.
So, let’s get started.
The first step:
- Know your exact take home pay. We get paid monthly so we only have to look at the amount we receive from one paycheck. If it’s biweekly, add them together. If you receive pay from more than one job, figure the total. Monthly works best because it is less upkeep than a biweekly budget and most bills are due once a month, but you are welcome to do a biweekly budget if you prefer. We will continue on the premise that this is a monthly budget. (I also have an “other income” section for the random gift or odd job but don’t include this initially into the budget because they are far too sporadic. Once we get this money, we can add it into the account balance wherever we want to put it. Example: We just sold our truck. We haven’t sold a vehicle in years and probably won’t again for years. Instead, I put the amount in our “Other Income” section for that month and added the money into our “New Car” fund. It could be put toward whatever you choose or even divided among many accounts. For now, ignore any income that isn’t dependable.)
- After you know your total take home income (exactly, including cents) from the month, write it on the top of a piece of large paper. This gets messy; make sure you have room.
Under that total, start listing all of your set expenses, the expenses that are always exactly the same every month such as internet, phone, rent/mortgage, car/health/home/life insurance, charitable contributions/tithes and offerings, with their exact cost. I do everything exactly to the cent so I know that it will all come out perfectly balanced at the end. Leave a space after this section.
- Next, write down other categories you pay for every month but that aren’t exactly the same amount such as gas, entertainment, food/household. Try to come up with an estimated cost for each of these categories. Err on the high side so you don’t end up stranded on the 20th of every month unable to buy gas. These types of categories vary HUGELY between people and locations and there is no “right” way to do it. This whole concept is fluid for people to set their own priorities which is why it works. For instance, a general rule of thumb is $100 per person per month for household/food expenses but we spend $60 per month less than that. Others may be considerably higher if they entertain more or really enjoy cooking and good food or live in higher cost of living areas. The adjustability of this budget is what makes it work.
- Then write down other expenses that only come up occasionally such as holidays, car maintenance, clothing, replacing furniture, health insurance deductible. Also include random expenses you have like crafting or other hobbies. So far, only write down the costs you know such as your insurance deductible. Leave a space under these.
- Finally, write down future goals you have such as a down-payment for a house, start a business, pay for a wedding, get out of debt – with the amount of money you need to accomplish them and the amount of time you have before you want to have it accomplished. This would mean planning for a $10,000 down-payment in 5 years for example. Write “$10,000 – 5 years” down. The math comes later.
- If there are any other expenses you have (and really think here!) write those down. Include a “miscellaneous” category. Some people will say not to have a miscellaneous fund. Don’t listen to them. You are new at this! You don’t know every single expense right now. I like to have a cushion of miscellaneous until I see a trend of similar expenses coming out of it and then make a new category for them. Plus, sometimes there are plain old “miscellaneous” expense. We bought a car seat recently. This only happens about every three years so far. We may never buy another one. You could take if from a different category if you felt like it – children or maybe even car maintenance, but for us, it is so random that it just comes from our miscellaneous. Place these other expenses with the list they most resemble – goals, unspecified monthly expenses, etc.
Sit back and look at everything. This list will often look intimidating. I actually almost quit at this point and so did the young girl I helped recently. It might look like you will never be able to spread your take home pay that far but it can be done. Stay with it. Taking a second to look things over helps you prioritize.
While I was helping this girl, she looked at a few of her expenses and actually said, “That’s dumb. I don’t need that.” That’s the sort of thing you’re looking for. Cancel those things. Sometimes we get sucked into things without needing or even really wanting them. I also saw that her car insurance was ridiculously high and told her to make some calls and get other quotes. If you rush this part, you may miss those things and miss opportunities to save some money to put toward something you value more.
Now comes the fun part. I hate math and love this. I don’t know why. Grab a calculator. You’re gonna need it. It’s time to start assigning numbers to your categories.
- Start with your take home pay. Subtract all of your set monthly expenses. Write down the new total in the space you left.
- Then start with your next most important categories (the things that keep you alive) except for food…unless that is your highest priority. I always leave food until near the end because we could live off $100 per month or $1,000 per month. It’s very fluid. Write down the amount you think you need in these categories. These will only be estimates for the most part right now so be prepared to change these numbers until you find a good balance. We have a few months of testing and adjusting every time our income changes. Extra money in these categories is good because then they can build up. For example, if you usually spend around $20 in gas every month, consider putting in $25 so when you have a month where you take a huge trip, you can use the surplus you’ve saved up. Some budgets may be too tight for much wiggle room here but try to get some. It may save you some day. Now subtract those from the new total you just wrote under your first section. Write this new number down.
- Now, calculate the amount of money you need to place in your dreams categories. This means if you have 10 years before you want to accomplish something, multiply 10 x 12 (months in a year) to find out how many months you have. Then take the amount of money you need in that fund and divide it by the number of months. Example: $10,000 in 10 years (120 months) = $83.33. Figure this amount out for all of these dreams. Subtract these amounts from the number you wrote down last under the previous section. Write down your new total.
- Subtract any other numbers that you can figure out exactly. If you need a $5,000 deductible for your health insurance, divide that by 12 so you can earn it by the end of the year. Or, if you believe you will need your deductible sooner, increase the amount. If you think you are lucky and healthy and can risk two years to save it up, divide by 24 months. Use some logic. You know your situation better than anyone else. Write down your new total.
- You can now take the remaining amount of money and divide it among your other funds. For example, we divided it among gifts for others, furniture replacement, a little fun money for each of us, vacation, miscellaneous of course, as well as a few others. At this point you might realize that you want more in some of these funds but don’t have the cash to do so or maybe you are already over your take home pay. Don’t worry. You have a few choices:
- Find a way to make a little extra income (whether it’s online or mowing neighbors’ lawns, think about opportunities around you.)
- Use your “Other Income” money to fund these accounts on a more sporadic basis.
- Decrease some of your monthly expenses such as: cancelling entertainment (tv, internet, phones, magazine subscriptions, etc.), calling your car insurance, decreasing or eliminating children’s allowances, switching companies, etc.
- Delay some of your big saving future dreams by a few years and put the extra toward these things
- Or re-think some priorities. This could mean anything from, eating out less and cooking at home more to moving to a more affordable house. I don’t take these things lightly. If you are spending more than you are making, you have nowhere to go but down into a pile of debt and stress and worry. There is no magic fairy that will show up to bail you out of mountains of debt. You need to be the fairy. You need to determine in your mind right. this. moment. that you will not allow your money to control you. Whew. Ok. Scary moment over.
- Add all your different funds together and see if they match up to your total take home pay. If not, figure out where you’re math is wrong and adjust. See if you want to move any money around a little. Look them all over and see if you would rather add $10 to this fund and take it from that fund. Prepare to adjust things until they fit right for you.
Why this budget works so well for me.
My grocery budget is $340 per month. Say it is the 29th of the month and I walk in the store to find that they are having a huge case lot sale. What is a girl to do? Usually by that time I have enough for a little produce and some milk…which we will still need. Do I just ignore the case lot sale where I can get olives for $0.70 and instead buy them for $1.50 for the rest of the year?
I borrow money from myself. This means you need to know if you have money and if so, how much, in another fund you can “borrow” from. We have a budgeting app called GoodBudget on our phones that works for us. It tracks all of our accounts just like I do on paper but I usually have my phone with me in the store while my paper budget sits at home in a drawer. I can open it up and see that in my down payment fund I have over $5,000. That is more than sufficient to allow me to buy a few cases of food. You can then buy the least expensive groceries knowing that you will be able to save more money from your grocery budget in the coming months to pay your debt back.
At the beginning of February 2016, I owed $196.18. Yeah. Over my grocery budget by almost $200! But by the end of the month, I owed right around $2.00. I was able to stay under my normal food budget by nearly $200 because I had stocked up when there was a huge sale and didn’t need to buy much during February. Any of your accounts can work this way! So long as you have the money to spot the difference. This means you never have to pay interest on a credit card or other loan because you are paying off yourself.
If you have any questions or concerns, please contact me. I am so excited about what this has done for me and my family that I would love to help clarify anything that can help you set up your own budget. There is nothing as freeing as our budget has been. Rather than guilt over buying something, we know that we have saved up the money for it and can enjoy it.
And if you are interested, here is a post I wrote about where exactly this budgeting system allowed us to get.