Budgeting: Why and How

That dreaded word: budgeting. Or if you already do it, that dreaded time of the month when you "reconcile the budget." Or in my case, the one day every 3 months when your husband wants to look at the budget and then gets overwhelmed and says that we're spending too much money. It's not easy.

So then why do it? Here's the top 5 reasons I've discovered as I've budgeted for the last 4 years.

1) Just keeping track of how you spend your money will help you spend less of it.
     Years ago when we had TV, I watched a segment on Oprah where they took a couple of families who felt like they were struggling and had them sit down with a financial expert to help them learn how to manage their finances. I remember there was one family (of four or five) who spent well over $500 a month on eating out/convenience store foods. A MONTH! And the family had no clue. When they realized they were spending that much money in this area, they definitely saw it was a problem.

     So I promise you that just looking at HOW you spend your money will help you spend less of it in areas. You'll be more conscious of where your money is going instead of just whipping out the credit card and not giving it another thought.

2) Knowing how much money you MUST have to live on, as in your most basic needs and bills, is one of the most important things you can do for emergency preparedness.

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      No one plans on losing a job, but for many Americans in the last 5 years, it has happened. If you don't have a financial reserve and don't even know how much money you need a month to keep your home, power, heat, etc., then you're taking away your peace of mind in a situation like that. It would inevitably take some time to find another job and you need to know exactly how much you need to survive on during that time frame.

       The best rule of thumb is to have enough financial reserve (that means savings in the bank) to last you through AT LEAST 4 months of no income. So if you know you need at least $1200 a month to cover your bills, mortgage payment, and groceries, you will need to have $4800 in the bank MINIMUM at all times. Having a food storage could help you decrease this amount since you'd be living off most of that (for my tips on food storage, click here).


3) It isn't always depressing; sometimes it's quite rewarding. It can help you reach your short-term and long-term goals, keeping you from spending your money on things that don't really make you happy.
       In our first few years of marriage, my hubby and I would get flack from family and friends that we were penny pinchers. For instance, we lived with hand-me-down furniture, we didn't travel very much, and we tried to be frugal in all areas. To some people, it looked like we were depriving ourselves. But to us, we knew that our first priority was to be out of debt and then save money to buy a house. We were very blessed that my hubby found a permanent job even before he graduated from college and we lived in our two-bedroom apartment for another two and a half years instead of rushing out to buy a house (when people were encouraging us to buy because interest rates and the housing market were dropping).

       Because of our patience, when we bought a house in June 2009, we not only were able to afford a nicer house than the year before but we also had a good down payment (and we were lucky that interest rates and the market had dropped even more). I cannot tell you how rewarding that has been. Because we had budgeted, scrimped, and saved, we were able to reach our long-term goal. Yes, budgeting can be very rewarding.


4) It can help you get out of debt faster, which only improves your credit score and sense of freedom.

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       I have a sister who can attest to this. For various reasons, they have been in and out of debt (and I'm talking about debt other than your mortgage and car debt) for many years. It wasn't until they created a budget and followed Dave Ramsey's snowball debt plan that they were able to get out of debt.

And those debts can feel like they're looming over you day in and out. Knowing that there are many debts to be paid if you lose your source of income is disconcerting. There is a definite sense of accomplishment and freedom that comes when you get out of unnecessary debt.


5) It is empowering to take charge of your money and change bad habits.
       It is empowering to know exactly how much money you spend and save each month. It is empowering to change bad habits and see your money increase in the areas you want. And it is empowering to reach financial goals. I wouldn't say that budgeting has made me some financial expert or even necessarily good at spending my money. But it gives me a sense of peace and comfort that I know the specifics of our finances. I know where my money is going. I am prepared financially in case of emergency. And I am reaching short-term and long-term financial goals.

 
The How of Budgeting
So now that I've hopefully convinced you why you should have a budget, the question is: how do I create a budget?

The answer to that is how it will work best for you personally. You can make it as easy or as hard as you want it to be. You can make it as detailed or general as you want it. Just know that however you do it, you want to have a way to be accountable to yourself.

You don't have to start from scratch either. Here are 2 budget templates that you can start from:

Family Budget
Monthly Household Budget

The reasons I like these budgets is because 1) They give you a place to estimate costs (we'll talk about that in a second) and 2) They give you a place to put actual costs and 3) Then they show you the difference. Not all of their categories might apply to you and you can simply delete them from your Excel spreadsheet.

Now how do you come up with those estimate costs the first time around? My advice would be to round up the last 2 months of bills/receipts and then use those to estimate. Granted, if you're not on a set payment plan for things such as power and gas bills, you may need to look over the last year and put varying amounts on each month. When it's a new month, you simply add another page to your spreadsheet with that month and year labeled.

If you've never saved bills/receipts then simply guess. BUT THEN start saving them the next couple of months. You'll need them for not only adding them up and putting them in your spreadsheet, but it will help you know how much to budget for in each area. If you hate saving little receipts, then pull out your credit card bills when they come and enter the amounts into your budget all at once.

My system to recording receipts

Since I am a little OCD, I save every little receipt and bill and faithfully enter it into my budget each month. I like to enter them in throughout the month so that I know if I'm running out of entertainment budget or grocery budget so that I've refrain from either until the next month. It helps keep me on track of where I want to be. The picture above shows my two drawers next to my computer monitor that I use for these receipts. "Need to be recorded" is where I put receipts until I have a chance to enter them into my budget. "Recorded" is where they go after I've entered them in. Then at the end of the month, I rubber band all the receipts and file them away for a couple of months just in case I need them for returns.

Where I put all my bills/other papers until I file them away.

Sometimes it's tricky to separate categories. For instance, I do most of my shopping at Wal-Mart since it's one of the only stores in my city. But the things I buy there could fall under multiple budgeting items (groceries and miscellaneous and gifts all on the same receipt). Again, since I'm a little OCD, I break them up on the receipt and put them under their respective areas. Or you can just limit your categories so you can put that receipt under one area.

Don't get frustrated or hung up on the logistics. The main point is that you're trying and you're keeping track of how much money is coming in and how much is going out.

In my budget, I also have our total savings broken up into different categories. So we might have $5000 in savings, but under the savings section of my budget, I have different categories for long-term goals or non-monthly purchases that don't really fit under my monthly budget. To give you a better idea, these are our categories:

Emergency fund (that we always keep a minimum amount in that we've decided upon),
Auto maintenance
Home improvement (someday we hope to have enough here to finish our basement)
Gardening (my husband is a big gardener)
Vacations (Glad I have this budget or we'd never go on vacations! My hubby isn't a huge traveler)
Clothing
Gifts (Birthday, Christmas, Baby showers, etc.)
Insurance
Preparedness
Service
Miscellaneous (AKA anything that doesn't fit in the monthly budget or the above listed categories)

So when we want to do home improvements, we look at our home improvement savings and see if we can afford what we want to do. I have our budget set up so that it will take our income, minus all our monthly expenses and then split the remaining amount (the money we put in our savings that month) into the different categories (you can do this either by percentage or set amount). Then I put in what we spent that month under these areas and carry each end-of-the-month total into the next month's budget of my spreadsheet.

The reason I do all of this is so we don't just blow all our savings at once, without thinking what we may need it for in the future. I want to make sure that when it comes time to pay insurance twice a year, we have enough for it. But I also want to make sure that I'm saving money to spend on my short-term and long-term goals as well.

Oh boy, I hope I haven't lost you all by now. If you're mind is swirling and you just want a copy of my spreadsheet (with all of our amounts deleted of course), just let me know. You can e-mail me at sweepsalot@gmail.com (for all those who know my personal e-mail address, you can send it there too).

I hope that these tips help you create your own budget and take control of your finances if you haven't already done so. I promise it's worth it!