How We Budget

I thought some of you may be interested in the process we (my wife and I) use to budget. FYI, we've done this for years and have a bit more budget freedom these days than what we did when we first got married, so some of this won't apply to people just starting out on a budget, those deeply in debt, etc. who will need to monitor their spending very closely. Anyway, here's what we do:

1. At the end of the year, I look at what we've spent the previous year. Since I use Quicken to track all our spending, this is rather easy.

2. I set up a spreadsheet (by copying last year's model) that lists all our expenses and income sources.

3. I take the information from #1 and put it in the spreadsheet. I list income and expenses by month.

4. I make any needed adjustments. For instance, I may think some categories need more money and others need less. I make the appropriate changes.

5. I look and see where that leaves the bottom line. If I'm negative, I need to cut expenses. If I'm positive, I can save more.

6. Knowing I'm ok for the year, I go six months without referring to my budget. I have a general sense of what we have to spend each month on each category, but I don't hound myself or make daily comparisons to how my spending lines up versus my budget.

7. In July, I re-do the budget, updating it for the first six months of actual spending, then repeating steps #4 and #5 above.

8. That's it. The rest of the year is on auto-pilot.

As I said, we're a lot more relaxed now than we used to be. Early in our marriage I did monthly budget updates -- we had to since we had debt we wanted to pay off and didn't have any surplus income as a cushion. 

For more on budgeting, see these posts:

• Know and Control Your Spending

• Why do Millionaires have Budgets?

• Three Ways to Track Your Spending

• Budgeting Part 1: Creating a Family Budget

Comments

[Ryan]

With pretty much all of my expenditures listed on electronic statements at the end of each month (bank statements, credit cards), I simply sit down for 20 minutes at the end of the month (actually a few days into the next month to make sure everything is accounted for) and figure out my actual expenses each month in each category. All cash expenditures are in the "cash expenditures" category which isn't that much anymore. I readjust my budget monthly as needed.

[Ron@TheWisdomJournal]

Great list. I need to get better at making a budget. Actually, I need to get better at STICKING to my budget. Thanks for mapping this out.

[Pam]

I have a "living" budget. It is a document that's up on my computer screen at least 4 days out of the week - it's constantly changing and being tweaked based on what's going on in my life. For instance, last week I suddenly needed to replace the front tires on my car and that unexpected expense was not in the budget last week. So I had to figure out where that money was coming from by tweaking the other line items on the spreadsheet. I can't imagine having a budget that isn't tweaked for 6 months. But I do have a pretty good picture of what my budget will be 6 months down the road because I project several months out. Couldn't live without my budget. (I know cuz I've tried and it's not pretty.)

[FS]

I'd second Ron, this is a great list, FMF. My wife and I do something similar with spreadsheet check every six months. As to autopilot, people might want to consider Mvelopes. (No, I don't work there, I'm just a satisfied customer.) The online program gives you a real-time budget status for your spending categories. This is really helpful for those "can we go out to a movie tonight" discussions with significant others! The answer: let's look at Mvelopes and see how much is left in our entertainment budget. Seriously, check out Mvelopes if your not satisfied with your current budget/spending plan system. If you're concerned about the cost: I'll say it is well worth the approx. $10 per month (based on annual contract) in money saved and painful financial arguments avoided with loved ones. Best wishes!

[D Claus]

Do you tithe based on gross income or net income (or somewhere in between)?

[FMF]

D --

Gross.

http://www.freemoneyfinance.com/2006/01/questions_about.html

[Nicole]

Last year I made a budget and started tracking my expenses for the first time in my life. Originally, I kept it in a Word spreadsheet and just calculated my spending in each category at the end of the month based on my credit card statements and auto bill payments. Any cash spending I just put in its own category. Other than doing that each month, my spending continued as usual and I frequently overspent my budget. In September, I switched over to an excel spreadsheet and tracked every individual expense on an almost daily basis. I became far more conscious of where my money was going, and was able to reduce my spending significantly, and save more money. Now, when I spend money, I don't only have to think about it at the point of sale, but also when I'm entering it into my budget spreadsheet. Since the spreadsheet calculates how much is left in each category for the month, I am able to adjust my expenditures as I go, making it less likely to overspend than when I was only calculating my totals at the end of the month.

I know a lot of people feel that they don't have time to track every penny they spend, or it seems too arduous a task. I understand that, but my feeling now is, if I don't have the time to enter an expenditure in my spreadsheet within a day or two after I make it, I am probably spending too quickly and too unconsciously. Now, I believe that tracking expenses is one of the most important things I can do to improve my personal finance, because it virtually eliminates unconscious spending. We all know how much we earn, and most of us know how much we save, but we often don't know how much we spend or where our money goes. If my credit card company and my bank have time to track every expenditure I make, then I don't think I have an excuse not to!

[chelsea]

Hi FMF,

We just posted a piece (by @SunFinancial) yesterday about getting started with budgeting on the Quicken blog: http://www.quickencommunity.com/quickenOnlineBlog/Budgeting-Basics--How-to-Start-Now.

I what approach to budgeting you ultimately take will be a very personalized choice, though taking stock of all of your spending over a month or two via spreadsheet can be a great way to get an idea of where you stand. I have personally done this, and also went even more basic as a first step by just writing down every single thing I spent any money on for a month. It was painful, but helpful.

Free services like Quicken Online are a good option for folks just starting out with budgeting, especially those already using online banking services with basic PF needs. It'll import your first 90 days of transactions from various accounts, auto-categorize, and show you where you're spending your money. I just find it to be a much easier starting point since I've tried multiple tactics myself.

Anyhow, good post.

- Chelsea, Quicken Online