Budgeting Tool #1: Monthly Budget Tracking and Budget Summary

As promised in Budgeting, Credit, and Debt II, I will be blogging about three budgeting tools that I think are very helpful: 1. Monthly budget tracking and budget summary. 2. Cash Flow Analysis. 3. Assets and Liabilities monitor. When tool #1 (the topic of this post) and tool #3 are used in conjunction, I believe a very solid analysis of one's financial position can be drawn.

Chances are most people know how much they spend on their rent or their mortgage. And, chances are that most people know how much they spend on car insurance, or a car payment. But, what about other expenses? Do you know what you spent on food last month? Two months ago? Three months ago? And what about consumer goods? Or gas? Or utilities? And, what about tuition or camp? Most people probably know their tuition obligations. But, do they know how much the "extras" cost them? Expenses add up and they add up quick. $5 here, $10 there, and $20 someplace else quickly can become $100 dollars, $200, and more.

I've found the best way to stay within a budget and make appropriate adjustments is to monitor the budget closely by careful tracking and monitoring. Your budget should provide you will information on where your income is coming from and where it is being spent. This tool alone will not provide a complete picture of your financial situation, but it should provide you with the information that can be used to make adjustments to your expense patterns.

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How to get started with creating a monthly budget (if you haven't already done so):
1. Record all expenses for a month on paper, in Excel, or using another software program. How you record expenses depends a lot on your current situation.
-->If you always pay your credit card in full every month, I recommend recording credit card expenses in the month that they are paid in, even if the expense took place in an earlier month. This minimizes bookkeeping.
-->If you do not pay your credit card in full every month, I recommend recording expenses (and accumulating interest) in the month that the expenses occur. If you were to only record the expenses that are being paid, you may not get an accurate idea of what you are spending.

2. Categorize those expenses and calculate total in each category. Chances are you will adjust categories over time as your spending patterns change and as your need for information changes. I recommend broader categories over more narrow categories to start with. Information overload will just make the budgeting process more arduous.
--> Some suggested categories: mortgage or rent, homeowner's association dues, tuition, extracurriculars, day care, food and supplies, gas and tolls, utilities, communications, tuition, consumer goods, dining or take-out, insurance, car payments, vehicle maintenance, medical, tzedakah, etc.

3. Organize your expense categories by "fixed" and "variable" to isolate areas you want to concentrate on reducing. For ease, let's define "fixed" as something that would require great difficulty to change, like rent/mortgage or tuition obligations and "variable" as something that could be changed with more concentration.

4. Record all income that is not "off-limits," i.e. income that you (and your spouse agree) is available to spend (although actually spending every penny probably won't prove to be a smart way to manage that money).
-->We record only "take home" income, tax refunds, and other small cash inflows such as reimbursements from our Health Savings Plan, product rebates, small birthday gifts, and "cash back" from our credit card.
--> We do not record interest income from our savings account, as we view this income as "off limits at this point in our lives. Nor do we record pre-tax income that went straight into the retirement account, or any unrealized gains (don't count your chickens before they hatch).
--> We do not record any gifts (or income) designated for our children. It is our view (which I have discovered is not shared by all) that we have a fiduciary duty to safeguard their assets at least until they have the capacity to make informed decisions for themselves.

5. Once you have recorded your monthly income and expenses for about 3 months, you can set the expense side by side and calculate an average amount for each category for each month to budget around. Knowing when your expenses fall is important for cash flow (tool #2) which we can discuss later.

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Seeing a budget on "paper" is extremely important. It lays everything out in "black" and "red" and lets an individual or a family deal with the reality. Hopefully the picture can inspire a family to get to work, rather than argue.

Some notes:
--> While most expenses should be categorized and "public," not every expense needs to be accounted for. Couples need to have some individual freedom. So it is wise to designate an amount for each spouse that can be spent without questions. (Hopefully this is tenable.) I've heard of husbands giving their wives an "allowance." This is a subject for another post. But, I find the idea of an allowance degrading and much prefer a team effort with two informed parties.
--> When you set out to make adjustments, don't give up. It may take a few months to see the adjustments pay off.
--> Set aside a regular time to go through the budgeting process so that you don't fall behind. Once you are behind, catching up can seem impossible.