Creating A Budget That Works
A while back I wrote 8 tips for effective budgeting. In that article I pointed out that it took nearly 10 years for us to come up with a method that works really well for us. One of the biggest hurdles for setting a budget is finding a system that works for you. There is no one system that will work for everybody, if there was there wouldn’t be as many budgeting products on the market.
Here is an outline of how we implemented a budgeting system in our home that has been working quite well for us for the past couple of years.
A budgeting system that works for us.
1. Begin with the end in mind. If you’ve been reading Serene Journey for a while you’ll notice we use this as a starting point for a lot of things. Beginning with the end in mind is so important and is a great place to start any decision making process, even budgeting. Ask yourself the following questions:
- What are your long term financial goals? (Mortgage paid off, have enough money to support you during retirement, passive income etc.)
- What are your short term financial goals? (Emergency fund, pay off credit card debt, spend less than you earn, etc.)
Once you know what direction you want to be going in you can put the next steps in place.
2. Track it. Track your spending habits for 1-2 months. Don’t just guess-timate but have real numbers. Either write in a notebook what you’ve spent or just throw receipts into a drawer, it doesn’t matter how elaborate or pretty this part of the process is; what matters is that you keep track of ALL of it. At the end of a month or two categorize your spending into two categories fixed expenses and variable expenses.
3. Identify fixed expenses. These are expenses that come at regular intervals and are roughly the same amount each time. Some examples of fixed expenses are:
- Car payments
- Cell phones
For us, fixed expenses are things we really need to pay. There is really no opportunity to reduce these expenses further, apart from switching providers. Over the years we have done a lot of comparison shopping and feel we have found the best value (service for money) with the providers we have chosen. It’s important to re-evaluate periodically to see if anything has changed with the competition and consider changing providers if it makes sense.
4. Identify variable expenses. These are expenses that vary depending on your requirements. Some examples of variable expenses are:
It’s not to say that our variable expenses are completely unnecessary but we have more control over what we allocate to each of these items. This is where we’re able to trim most of the fat as they are not essential (apart from clothing but that’s debatable).
5. THE spreadsheet. We have created a spreadsheet to track our budget. Here’s a link to a sample of our spreadsheet, complete with examples so feel free to export it to your PC and play around with it. Of course all the amounts and names have been changed so if you do use it as a starting point please make it as personalized as you can.
Tips for evaluating your budget and working with the spreadsheet:
- Go through your budget every payday (or thereabouts) to make sure you are on track. Have your bank transactions and credit card statements close at hand (we have found this to be easiest when you have access to all of your accounts online).
- Start by filling in your current bank balance followed by what needs to be paid before your next payday.
- Pay online accounts, write cheques and transfer any left over amount into savings right away; this helps remove the temptation to spend frivolously. To make things quicker, easier and accurate we rely on formulas in our spreadsheet.
Why this works for us
It’s flexible. In the beginning we took our budgets very literally. When we said it was $100 on groceries it was one-hundred-dollars-on-groceries. It was way too rigid, unrealistic and took the fun out of everything. With our current system we are a lot more flexible, within reason of course. We keep a set minimum in our accounts to act as a self imposed overdraft protection. Come payday that overdraft amount is topped up if need be and becomes our zero again. This really helps when we feel like going out for an extra dinner or stopping in for a coffee on the way home from the city. Yes I hear some of you saying “well that should all be budgeted for” and I agree that if it works for you do it! But that method doesn’t work for US. Life is full of surprises and it’s nice to be able to be spontaneous from time to time and we’ve found a way that allows us to do that.
It accounts for everything. This spreadsheet accounts for everything we spend our money on. There are no surprises. We’ve created what we call “virtual debt”. Virtual debt is not debt per se but rather those big ticket items that you pay usually once or twice a year and can be quite substantial. Property taxes, for example, are included in our virtual debt category. This is a large expense that comes up once a year and, if it’s not planned for it can really set you back financially. Insurance is another example of this virtual debt as are house repairs, car repairs and Christmas gifts.
We’re on the same page. Gwynn and I are on the same page when it comes to our budget and our financial goals. We understand that this is a fairly unique situation but it helps a lot! Communication is key when it comes to setting a family budget. It can be really difficult when one person wants to aggressively pay down debt while the other wants to aggressively improve their wardrobe. You can’t do both and as a result everyone is unhappy. Try to find a balance that allows both of you to work towards your goals eventually reaching a compromise that makes both of you happy.
Setting a budget now can really help you achieve your plans for the future, whatever they may be. Finding a system that works for you is the most important budgeting advice I can give. A budget shouldn’t be something you ignore or turn your back on because it’s too hard to stick to, if it’s realistic and you have room to move it’s actually a great tool.
What is some of your best budgeting advice? What system works best for you and which have you tried that really don’t?
8 Tips For Effective Budgeting
Broke Bob, Dollar Doug and Frugal Fran – Their Story
5 Ways To Save Money With Young Kids
A Friday Night Out – At Home
Our Frugal Lifestyle
Photo courtesy of: Tracy O