Budgeting 101

I’m going to be the first to admit, before doing the Financial Peace University offered by Dave Ramsey, JP and I really had no clue what a real budget consisted of. We tried to do one once, and as soon as it became apparent we were overspending, we got upset (I cried) and then got mad, and then quit. We knew we had to have money to pay the bills, and just kind of took the rest and did what we wanted to with it. After the first few weeks of FPU, we really had started thinking differently, and realized there was so much more we could do with our money than spend it on stupid stuff we really didn’t need. Like save up and take a great vacation, or even retire rich some day. So we started doing a monthly budget. And like I said before, we stuck to it for a long time, and then slowly started going off track. This time, we’re much more serious about it, so I foresee it working for us much better.

One of the things Dave Ramsey says that we scoffed at, but then learned the importance of in budgeting is this: Name all of your dollars.

Now, I don’t mean this five is named Steve and that twenty over there is named Caroline. What I mean is make sure every dollar has a designated spot on the budget. Every dollar you bring in needs to have a specific thing that is done with it, whether it’s in the budget to pay a bill, put in your piggy bank, or hidden in a coffee can buried in the backyard (not smart…even with interest rates being low, a few cents a month adds up to more than what your coffee can has in it)—it HAS to have a designated spot. If it just floats around out there with no purpose, that purpose is quickly going to become “SPEND THAT SUCKER!” Let me tell you, it REALLY helps us to visually see that every dollar we have is used for something. Even if it just goes into one of our savings accounts, we see that is where it’s supposed to go so we don’t want to deviate from “the plan”. It’s helped. A LOT.

I really can’t stress enough the importance of a budget. It is integral in helping to get out of debt and save.

Since most of us are high tech with debit cards, credit cards, online bill pay, and the like, the idea of our money moving here and there and everywhere is pretty abstract. There have been studies that have proven that there is less emotion associated with swiping a credit or debit card than reaching in your wallet and pulling out cash. It’s true! I’ve been known to carry $20 in my wallet for weeks without breaking it, all the while swiping my debit card without hesitation. You have more attachment to actual cash than to this abstract funds transfer that happens with the card. This is why we do the cash envelopes. We have cash envelopes for our personal spending money, for Lily (for diapers, prescriptions, etc), for our entertainment (date nights), and for groceries.

Now, Dave Ramsey suggests also doing a cash envelope for gas, but in today’s world, it’s just not the most practical idea (at least, not for us. If it works for you, GO for it). It’s a lot more convenient to slide your card at the pump (especially at night, and when you have a baby in a car seat in the car). So, to make sure we stick to the budget, we have a separate checking account just for the cars. Each month, we transfer a certain amount for our gas budget. We also pay car insurance out of it, and any car maintenance (oil changes, tires, car washes, whatever). It’s what works for us.

Here is our basic outline for our budget.

First, I write down our incoming money. I only factor in JP’s paychecks and mine. I take the lowest amount the checks could be (usually I look for the lowest the check has been in a year and subtract $50), and add them together to get the total we’re working with for the month. This is to teach us to live on less. If we can survive on lower than we’re bringing in and still save, then we’re doing what we’re supposed to. This also gives us a little cushion in case something unexpected happens (like an ER co-pay or a vet visit) so we don’t always have to dip into our savings. “But wait,” you’re thinking, “didn’t you just write that you have to name ALL of your money? Now you’re telling me to round the paychecks down and don’t count any other income?” Yes, that’s what I’m telling you to do. I’ll tell you more about what you can do with any extra in a little bit.

Second, I listed all of our regular bills (not debts- like credit cards, medical bills, etc- but regular bills). Though a house payment or car payment would be considered “debt”, I list them here because they are important. I also list regular charitable donations here. You don’t want to ever skip a payment on something that could cost you a roof over your head, water, heat/electricity, or food for your family. So, we have:

House note

Truck payment

Water

Electricity

Natural Gas

Direct TV

AT&T

Verizon Wireless

Car insurance

JP’s life insurance

Cell phone insurance

ADT Security

Cook’s Pest Control

Netflix

Hulu

Association Dues

Donation to Vanderbilt Children’s Hospital

You will notice that some of these are blue. That is because they are “negotiable” parts of the budget. This means that if we were ever facing a hard time financially, we could drop these services completely or change them to lower the price. They are luxuries, not necessities. If you find when you do a budget that you are spending more than you are earning, or that you’re barely breaking even, it is most likely time to bite the bullet and re-evaluate your necessities vs luxuries. It sucks having to do that (we’ve been there) but the amount of stress relief you’ll get from having even a little extra money at the end of the month is totally worth it.

Next on the budget, I list the debt items we pay. We are fortunate enough not to have any credit card debt, which is huge because the average American couple has around $10000 in credit card debt at any given time. If you pay the minimum amount each month on $10000, it’ll take you on average between 18-24 YEARS to pay off the balance, and you’ve paid it back FOUR times. Kind of makes you think twice about charging dinner, when you realize you’ll be paying $200 by the time it’s all said and done on a $50 tab. We are also fortunate enough not to have student loans, which the average person is generally saddled with around $10000-$20000. I don’t have statistics on the average life span of a student loan, but I am sure most are at least 10-15 years. Though they’re lower interest rates than credit cards, you still end up paying back way more than you owed if you just pay the minimum. Even though we don’t have credit card debt, we do have some items that we have to get paid off. They are mostly medical bills. I’m not airing all of our laundry with our debt so here is a framework you’d use for the “debts”.

Gap Visa Card

Mastercard

Medical Bill

Medical Bill

Student loan

Out beside every single one of these items, I have a column titled “Amount Due”, another column titled “Amount Paid”, and a last column titled “Over/Short”. Like this:

BILL Amount Budgeted Amount Paid Over/Short

Electricity

Water

House

I know some of you are thinking (because I did at first), “How do you budget for a bill ahead of time when you don’t know how much it will be until a few days before it’s due?” I make my budget for each month a week or two before that month begins. And you’re right, I don’t have the electric bill, water, or many other bills by then. So how do I do it? When we first got started budgeting, I looked back on our bank statements for a year prior, and wrote down the amounts of all 12 water bills, electric bills, phone bills, etc. I found the month that we had the highest bill, and rounded that number up to the highest $25 increment. (For instance, if the highest water bill I found was $54.90 –which was when we had a leaky toilet- and I rounded up to $75). That way, I was pretty confident we’d always have the worst case scenario budgeted. Some people take the 12 month time frame and average them together, but this could still leave you with a deficit one month if you have a higher than average bill. For instance, it’s colder than average one month, and you have had to turn your heat up higher than normal. You average an $80 electric bill, but suddenly you have a $200 electric bill. I’d rather budget every month for a $200 electric bill, which is why I have an over/short column.

Each month, I write the amount we budget for the bills. Then as I get them and pay them, I enter in the amount we actually paid, and how much of an overage (or shortage, which do happen occasionally still) we have. Now you’re asking “But what do you do with an overage?” Even though I work at a bank, I still utilize the online banking program offered because it allows me to title all transfers (see? I’m naming my money). Each month, I schedule transfers of the overages directly to our savings account. I do each separately, one day after the bill drafts or the check posts, and note what it is (“Electric overage” or “Water bill overage”). This money could also be used to pay extra payments on debts (which I’ll get to in a minute). In the event of a shortage, I will transfer the money to cover it back out of savings. I make sure to note what it is for, and if it happens again the next month, I will usually re-do that item on the budget. NOTE: Always be sure to really check your statement if you have been paying a certain amount regularly and then all of a sudden it changes. Something may be charged to you that isn’t supposed to be, or in the case of a higher water bill, you may have a leak. A personal example is when our Verizon bill started going up, we saw they had changed our insurance rate. We ended up getting cheaper (and better) insurance through Best Buy for our phones.

Next on the budget, I list all of our other expenses. We already have automatic transfers set up from our paychecks to go into various savings accounts (including L’s). I put those here, too. A lot of people don’t budget in savings, but we want to be sure we do. Again, the ones in blue can be done away with or the amounts reduced. There are many months that I don’t even budget for clothing because you honestly don’t NEED clothes every month.

Groceries

Gas

Entertainment

Clothing

JP Spend

Amy Spend

L’s care

Pets

Extra (this would be birthdays, holiday parties, cookouts you’ve been invited to, anything that would cost you extra money)

Savings deposit

Savings deposit

Savings deposit

L’s Savings deposit

After I write down all of the amounts I have budgeted for the bills, I add those up and subtotal them at the bottom of that section. I subtract that from the money we have coming in and see what is left over. Then I move on to the other expenses section. I take the leftover amount and divide between the items I listed. Because it is just three of us (and one of us is a toddler, who doesn’t eat much), I can usually get by with a grocery budget of between $80-$90 a week, and have left over money (because I coupon). There are some who do cash envelopes who break the groceries into compartmentalized sections (health & beauty, cleaning supplies, food) but that doesn’t make sense to me. It is a much bigger waste of time than benefit- you have to separate your groceries into three separate transactions, pull money from three separate envelopes, etc. It’s just not worth the hassle. If we have an overage at the end of the month, I deposit the cash into a savings account. Starting out, it’s often hard to pull a month’s worth of money for all of these cash envelope items out at a time. What I do is pull it out week by week (on pay days) until we get to a point where I can pull it out every two, then three, then every month. I have my envelopes marked “Groceries week 1” , “Groceries Week 2” etc. Doing it week by week at first is also a good teacher- when the money is gone, it’s gone, so you have to really watch what you’re buying. If you had a month’s worth all at once, you might be tempted at first to pull from week 2, or 3. At first, a lot of people end up eating soup and grilled cheese by the end of the month because they had rib eyes and shrimp the first week, simply because they’re not used to budgeting and stretching their money.

For gas, we average about the same $80-$90 a week. This is usually a tank of gas for each of us. When we’re really not spending money, we’re not driving around as much, so sometimes we can stretch it to a tank every 2 weeks. If there is an overage at the end of the month, we leave it in this account, because we also use it for car maintenance. It helps us have a little bit in reserve for oil changes, tires, and god forbid, car repairs/emergencies.

For pets, I budget mostly for dog food, but in months where they have to go for annual shots, or if we take them to get groomed every few months, that goes in that budget. If there is an overage here, I generally leave it in the envelope. I do this because then we can take them for an extra grooming or something, or we have money if there is a vet emergency.

For L’s care, it is mostly diapers now, but when she was younger it was baby food, formula, teething stuff, things like that. In a month that she has a well baby appointment, I go ahead and budget in co-pay. Overages at the end of this month get deposited into her savings account.

Spending money is handled a little different. One thing you HAVE to remember with the spending money is that it is YOURS (or your spouse’s) to spend. I hand JP his and don’t say another word about it. If he wants to spend it a dollar at a time and make it last all month or spend it all at once on a video game, that’s his choice. If I don’t touch mine and save it for months at a time and then go buy a pair of $200 boots, or if I drink mine all up in Dunkin Donuts iced lattes (which I won’t be doing, by the way because they’re not in my diet plan), it’s mine to do it. If we decide to pool it together and have an extra date night, we can. But one thing to remember is, when it’s gone for the month, it’s gone. There’s no more. On tight months, this is the first thing to go off the budget (followed by entertainment).

In the extras, this is where you budget for birthday gifts, holiday events, or anything that counts as a special event. When you’re doing your monthly budget, it helps to have a calendar nearby so you can look at the birthdays and holidays. We have a set amount that we spend on family members and kids for birthdays, so we just need to figure out how many birthdays are in a certain month. There usually isn’t any extra left at the end of the month here.

As far as the savings accounts go, you’ve read by now that we have a lot of additional money going into the savings accounts in addition to what automatically goes. We have decided that it is as important to us to build up good savings as it is to get out of debt. So we carve some money out of each of our paychecks to go directly into our savings’ accounts. These usually stay pretty constant, but in the event of a month full of birthdays (for us, that’s April- L, JP, brother in law, cousins, nephew) or something out of the ordinary, we can lower the amounts.

I then take the total from that category and add it to the bill subtotal. There is my total spent every month. I subtract it from the total coming in and if there is anything left (which there usually is a small amount, usually $50 or less), I make a transfer for that amount to savings, or we’ll agree to an extra date night or put it towards a big expense we’re saving for (like a vacation)- something like that.

With all that swirling around in your head, I know you’re still wondering: But what if you get EXTRA MONEY?? What do you name that, smarty pants?!?!

Say JP works some killer overtime, I have a Thirty-One party, we sell everything but the kitchen sink in a yard sale, I clear out our storage closet at a consignment sale, or someone gives us a gift. What do we do with it?

Prior to budgeting, we spent it without hesitation.

Now, we think about it. What we are planning to do this year with extra money is this: half will go directly in savings, and half will be paid on a debt.

So, JP works some overtime and gets an extra $300 (after taxes). We immediately transfer $150 to a savings account and take the other $150 and apply it to a debt we have. If you have credit cards or multiple loans, you’ll want to sit down and look at the interest rates and the amount you owe on them. As a general rule it’s smartest to pay extra payments on the debt with the highest interest rate or balance. If you have a credit card with an 18% interest rate, and one with a 5% interest rate, you’re going to pay way more in the long run on the balance that is at 18% if you’re just paying the minimum payments. Since we don’t have credit cards, we go by the debt with the highest balance. As I mentioned, ours are mostly medical bills so they’re not accruing interest. Paying the highest balance one down just gets the creditors off your back faster. For our medical bills, I budget $50 a month on each payment. The minimum they request from us is $25, but since we can fit a higher payment into our budget, I do it. If we ever had a hard month, I would drop those down to $25. With credit cards, if there is any way possible you can squeeze even $10 more than the minimum payment in your budget, you’d be doing yourself a huge favor. We have a truck payment that has a minimum payment and accrues interest. We know every little bit extra we can throw at it will make the interest we pay less, so when we have extra money to put towards a debt, that’s the one we pick right now.

One of the reasons I am so big on transferring any extras to savings is so we can be prepared for life. Unexpected things happen. The car breaks down. The fridge quits working. The sink leaks. If you don’t have money set aside for emergencies, these sorts of things can be catastrophic. It doesn’t suck any less having to take your hard earned money out of savings to go buy a new tire, fridge, lawnmower, or whatever else might have broken, but it’s a huge weight off of your shoulders to know you HAD the money to do it, and didn’t have to beg or borrow it from someone else (or open a line of credit you didn’t need or want). It’s nice looking at your bank balance and seeing it grow (even if it’s just a little) each month.

So there you have it. A crash course in budgeting.