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.
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.
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.
--> 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.
Monday, October 23, 2006
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I also highly recommend spending the $30 to get Microsoft Money or a similar program. This program tracks all my expenses, automatically detects categories, and can download my credit card statements as well as my checking account savings. It tracks how much income vs. expenses you have in all your accounts, or in one account, whatever you set it to check. I can go on and on about how it helps organize your money. Again, its only $30 for the deluxe version. A very worthwhile investment.
Thank you, thank you. Though most of this is stuff we (should?) already know, this functions almost like a checklist.
Thanks also to Aishel - good advice. I didn't know that the programs can download the info for you. One of the hardest parts in this is actually *doing* it.
SL - You may want to set up drop-downs on the side or something similar for these series... the easier it is for people to access, the better.
Thanks SL, this is a great idea!
The Rebbe is very glad to read this post. In Israel, especially, where the banks now give overdraft credit of up to 6 times your net salary, it is very easy to spend money that you don't have. It is nearly impossible to repay the overdraft.
One thought, however. In Israel there are organizations, such as Pa'amonim, that help people do what is written in this post. They, however, suggest going back 3 months and taking the average monthly expenses as a basis to calculate the future. That way, you have figures to start with, and if need be, can already think of adjustments.
Don't forget to discount all those extra food expenses for the chagim. What to do with them, I imagine, will be discussed in tool #2, which I look forward to reading.
Thanks for the advice and tips all.
Tzionisher Rebbe-I've heard a lot about the overdraft policies and Israel and they are baffling to say the least.
You are correct that three months of data is needed for future planning. Three months is a minimum. I'd say 6 months is even better considering the Nissan and Tishrei, the two costliest months, are 6 months apart.
Cash flow is important to meet the month-to-month discrepancies. I'll be covering this later.
I used to do create a simliar budget in MS Excel. It didn't take long to realize we were "in the red" every month. Convincing my wife to help make lifestyle changes was tought at first. But when I showed her that she had spent $1,500 on clothes (for herself) for 2 consecutive months, she got with the program. Within 2 months, we were able to achive positive cashflow.
Sleep Deprived-Hope you won't mind. I'm planning on using your good news in my next budgeting post.
I am a strong believer that seeing things clearing in black and red is the easiest way to make changes.
Goodluck with your newfound cashflow.
I just discovered you blog and I love it.
We in the hole to the point we won't be able to pay our rent. Ack!
I'm disabled and going to school. DH is working but he hates and the pay sucks too!
We just moved to a nicer neighborhood and the we lived at before we were literally dodging bullets and crack addicts.
Now I will be able to see where the money is disappearing to.
I only spend my money on rent, food, and clothes for our son. I have literally spent $200 for this year on clothes for myself and have no proper shul clothes.
It may seem trifling to some people for me to be upset about this but I don't like to be the bummiest gal in the room.
I just bought myself a winter coat because after 12 years my other one finally gave out.
Just thinking about this is making my head hurt!
Welcome new Anonymous. Pick a stage name and start commenting. I'm sure you will have a lot to add.
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