Make a Budget #5

Jan 17, 2012 by

As we start 2012, I’m focusing several posts on Budgeting. This is post no. 7 in my Budget series, and the fifth post covering my “6 Steps to Create a Great Family Budget.” The last post covered Step 5; this post adds Step 6: “Track expenses and compare monthly to budget.” Click the Budget Category link on this blog’s homepage to see the entire Budget series.

My “Make a Budget” series walks you through the 6 Steps that we use and that I think will work well to help you make a great budget. What makes a budget great? It’s not how well you forecast your fortunes or misfortunes during the upcoming year. The measure of a budget’s value is how well it helps you make better money decisions. And that’s the sort of budget my 6 Steps are designed to make.

Tracking Expenses

Here’s where we get real value—in the form of making better money decisions—from all the work we put in on our budget. We keep track of our spending. My suggestion is that, by any method that works for you—keeping receipts, making a quick note whenever you buy something—keep track of your spending. We categorize everything we spend in the same line items we set up for expenses in our budget, and we record each expense in Quicken. (Well, we used Quicken until Intuit dropped the ball and failed to release a version of Quicken for Mac that’s compatible with Lion, the latest Mac operating system. I upgraded, and now I’m frozen out of Quicken until Intuit gets its act together and starts treating Mac users with respect.) But a journal, the spreadsheet where you prepared your budget, any personal money software package like iBank 4 (if you’re a Mac user) or a free online budgeting site like Mint.com can all work. If you use a tool like iBank 4 or Mint.com, you’ll be able to get great reports that will show you, for each month and for the year-to-date, your budgeted and actual income and spending for every line item in your budget. Very cool!

Way Too Tedious!

Many people shudder at the idea of tracking their spending and doing the work of recording everything they spend. A few tricks we’ve learned to make it easier:

  • I’ve made a habit of asking for a receipt when I spend money. I shove the receipt in a pocket and pile them next to my computer at home. Every day or so, I enter all the receipts into Quicken (or I did, before Intuit shut me down).
  • It’s easier to find 5 minutes a day recording spending than to sit down for an hour every week or 10 days.
  • My wife enters her own spending. Get every family member involved; ask each person to record his or her own spending.
  • Just force yourself to record spending for one month; once you see the fun and useful numbers you get at month’s end, I think you’ll be motivated to keep it up!

How to Pay Periodic Expenses

A final word on “periodic expenses,” items like insurance premiums and tuition that often are paid quarterly, semi-annually, or annually. In Make a Budget #2, I suggested that, even though you don’t pay these periodic expenses monthly, include in your budget a monthly expense, equal to 1/12th of the total for the year, for each periodic expense anyway.

We set aside the cash we budget each month for periodic expenses into a Planned Savings fund in a separate savings account at our bank. (If you balanced your budget, you’ll have the cash to set aside, right?) Then, when the bill for a periodic expense is due, we use cash from our Planned Savings fund to pay the bill.

Our Planned Savings is not Emergency Savings! In fact, our periodic expense set-aside cash is not really “savings” at all, but just a way to make sure we’ve got the money for large, periodic expenses when they’re due. If we don’t set aside cash for periodic expenses then we might be scrambling and needing to borrow money at high interest rates to pay them when they’re due. Ideally, (and, yeah, I know, none of us live in an ideal world, but we do our best) our Emergency Savings fund is only for true and unexpected emergencies, like a job loss, not for predictable expenses like our auto insurance premium.

The bottom line: We plan and budget for our periodic expenses and set aside cash monthly so we have the cash on hand to pay these bills when they’re due. This practice alone goes a long way toward keeping us out of the high-interest debt trap!

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