After posting a few weeks ago about our goal setting for 2024, and then again last week after sharing my planner spread for January with our monthly goals on it, I was asked how we work toward financial goals. As you might guess it involves planning, and the way we plan with our money is through a budget. So as I'm about to begin setting up our February budget, I thought today would be a great time to share a little about how to set up a budget so you too can meet your financial goals.
Why Budget?
Lots of people struggle with budgeting. In fact, many people feel about getting on a budget the same way they feel about getting on a schedule. They avoid it like the plague. The truth though is just like a schedule frees us to spend our time in the best way possible, a budget frees us to spend our money in the best way possible.
Shortly after I got my first job, Daddy sat me down and taught me how to make a budget. We wrote up all my fixed expenses like car insurance. He taught me how to estimate variable expenses like how much gas money I'd need. We then talked about goals like saving for college. I was able to then take my lowest income for a week and multiple it by four to draw up a monthly budget. It wasn't very complex, I was only 16 and paying for my vehicle cost was my biggest concern. There wasn't all that much money in my budget either because while I was working in my summer break, I was only making $5.25 an hour working evenings at Shoney's. However, budgets work no matter how much or how little money you have to budget and so that lesson was one of the most practical that he ever taught me and it's a practice that I continue each month.
Have you ever spent money on something, and then later regretted spending it? I've done that before. Have you ever second guessed if you have enough money in your account to cover something? I've done that more than I care to admit to. A budget frees you from those concerns. By budgeting you are giving yourself permission to spend money in a particular category, and when it's all put together you don't have to worry if you are spending your money in the wrong place because you have a complete view of your finances and a working plan.
The biggest advantage though to budgeting is that money is a finite resource, we each only have so much of it, and by budgeting it feels like we are better able to stretch the money that we have. I don't know about you, but whether I budget for a particular month or not, at the end of it the money is gone. The question is do we know where it went and did it do what we needed it to do? By making a plan, I'm far more likely to not only know where the money went, but to have it do more for me.
Process of Budgeting
If you've never really run a budget before, or feel like your own could use some tweaking, perhaps hearing how we go about the process will give you some ideas to make your own budget better work for you. We always start by making a list of our fixed expenses. And the first item we always outline is what we want to give to Church. We don't believe in tithing, so we don't give a set percentage, but we pray about it and determine what we want and are able to give anytime our income changes. Occasionally we'll have a month where we give that amount plus some to either the Church or a worthy cause, but we determine our baseline giving and stick to that until we have an income change. Other fixed expenses are things like mortgage, car insurance, phone bill, internet bill, our debt payments. All things that are the same each and every month. Next we make a list of our variable expenses and do our best to realistically estimate what they will cost us. These are things like our electric bill, groceries, gas, as well as car and house maintenance.
Once I have a list of all of our expenses, I then estimate our monthly income and compare the two. If the expenses are higher than our income we are in trouble and we hack at it and rework the numbers until we get something more reasonable. Optimally there will still be money left in the budget though. This is when I figure in sinking funds and savings goals. Sinking funds are areas of the budget that we routinely spend money on, but not every month. For example haircuts. I can count on spending money on the boys for haircuts every other month, about every 8 weeks, and for us girls twice a year give or take. So some months I need to allocate funds there and some months I don't need any funds in that designation. Savings goals would be things like saving up money for a new van to replace our current van or planning for retirement.
The ultimate goal, after I've gone through everything that we might need to spend money on in a given month, is to have $0 left. I want to allocate every penny. Remember it's all going to go somewhere, so make sure it's working for you and doing what you want. This is where Gary gets involved. Some couples go through the entire process together, but as the planner and control freak in our relationship, I do the leg work first and bring the first draft of our budget to the table. We then discuss areas that need to be reworked, and make changes. We also talk about what that entails, maybe our gas budget needs to be higher this month because we are planning a trip to a Church meeting, and so we'll lower our spending in another area, by paying a little less down on debt this month. But at the end of the process we want every cent accounted for.
This is sometimes called zero based budgeting or zero sum budgeting. The idea is that you give every dollar a job. This money is going to our mortgage and that money is going to our electric bill, then this money is set aside for fun things like tv streaming or date night as a couple and that money is put into a savings fund. Again this is about priorities, and what fits your individual family. (Just like the scheduling remember?) Back in December I hadn't spent any money on the kids for clothes or shoes for all of 2023. The few things they needed I was able to pick up at the consignment store with the credit that we had from consigning other clothing they had outgrown. So, when I knew we were going to Alabama and that they didn't have any warm clothes that fit, I prioritized the clothing sinking fund in our budget for the month. Right now finances are tight so it wouldn't make sense for us to plan a date night and a huge chunk of money in the restaurant portion of our budget, instead we should prioritize our necessities. Ideally, you are somewhere in the middle and can balance both fun and needs.
Working the Budget
If that was all it took to budget, everyone would be a pro at it, unfortunately you have to then work it. What happens when your electric bill is a little higher than you planned, you have to subtract some money from another area. Or what happens when you didn't spend as much on groceries this month as you set aside, you need to add some money to another area. In our experience this is always a mixture of the two. So far in January we've over spent a bit in our groceries and homeschool categories. On the other hand the electric bill and house maintenance expenses are less than I had planned, so they have actually almost to the penny balanced out. A little tweaking to our gas budget and planning one shorter Adventure Friday trip this month, and we are back on track.
The real way that a budget helps is when you continually check back in and make adjustments over the course of the month. In all of our years of budgeting as a family (that would be 16+ at this point), we have never had a month that didn't require adjusting. Sometimes that was because of over spending, sometimes that was because of bringing in more money than we had anticipated, but they always require you to make changes. One great way to do this is to track each purchase that you make. After trying different apps and software, we use EveryDollar these days, but I use to just plug it all into an excel spreadsheet, in fact my dad still does it that way.
The biggest part to actually making the budget work for you though, is to stick to it. A budget does you no good if after you set it, you then go and spend money any and every where without following it. This is hard! It involves setting boundaries on your own behavior and sometimes a fair amount of self-denial. When the restaurant budget is out, it doesn't matter how tired I feel after an Adventure Friday, we have to go all the way home and not pick up a snack or meal. It means no matter how sick I might be of sandwiches for supper, I can't order a pizza. It means that we have agreed to spend x amount of dollars and that is for x number of breakfasts on Sunday morning, and nothing more. When the grocery budget is out it means that no matter how much Dr. Pepper makes me less cranky or that seafood is my comfort food, we are not picking it up at the store, but we are going to finish out the month with water and ramen noodles. When there is only so much left in the grocery budget diapers get priority over treats like a bag of chocolate. Sometimes sticking to that is hard. (Can you guess the one area of the budget that is our weakest area - yep, eating.)
Evaluating the Budget
The final step to using our budget each month is to then evaluate what did and didn't work, so that we can make improvements in our next budget. This means I look over what we've spent in an area over a few months, such as groceries. When I notice an uptick in spending, I look through all those transactions I tracked to determine was this poor planning, are cost increasing, or were there a couple of unexpected expenses in this category. Looking over my grocery budget over the last few months, I can decide I'm still allotting a reasonable amount each month, but the bill was higher this month, because there were several things I ran out of all at once, and so I'll make a note that in four months, I'll probably need to restock some things and pad that section of the budget a little more then.
Another way I evaluate the budget is by putting together a spending analysis. This lets me see what percentage of our budget is going toward what. As another example I can see for the last several months our housing has been just over 50% of our budget. That confirms that we either need to make more money or we have got to sell this house. Sometimes there are blips in the percentages, such as June when we have to renew car insurance and pay for tags and title on the car. Other times we can spot trends in spending and know where we need to crack down on our spending.
The final way that I critique our budget is by comparing our month to our financial goals and writing up a little review of our month. Not every month will see steady progress toward our goals, they tend to be more of halting steps for us, but over time we should see progress. One of our goals for this year is to get on a stable financial footing again. For us that means we find a better job or we sell the house. Gary spent some time each week applying to new positions and we have the house on the market, so we are doing what we can in that area even though we aren't reaping the financial rewards of the work yet. Another goal is to pay off the loans from our parents, rather than paying down that debt this month, we had to borrow a little more. That is actually moving away from our financial goals. So we are reexamining the budget this month to see if there is some way to cut it down further. I ask myself questions such as are we overspending in areas? How did we do compared to the original budget for the month? How can we improve next month?
All of this is so that we can have a better handle on our money for the following month. If each month we find something we can do to improve then we will be that much closer to reaching our goals. Which ultimately are to be debt free, and be able to pursue a few of our dreams.
Advantages to Budgeting
Budgeting is a ton of work, but the rewards are manifold. We always make sure our bills and debts are paid out. We can then best allocate funds to other needs and fun. I never have to wonder if I have enough money to get something that we genuinely need. When we do have fun stuff built into the budget I don't have to feel guilty that we are going out to eat or not spending the money on something else. It gets us closer to our financial goals so that dreams can become plans. Finally, I always know that we are doing the most that we can with the funds we have by being the best stewards that we can be of our money. There are countless advantages to budgeting.
While it's not always fun or easy to be on a budget, we are firm believers in the power of budgeting. Even if we suddenly had a million dollars tomorrow, you had better believe we'd be budgeting where it was going before we wrote the first check out. Budgeting, even on a small income gives us freedom that we wouldn't have otherwise. It gives us permission to do something different this year for the kids birthdays. It gives us permission to go to a Church meeting. It tells us when we need to watch our food expenses, and in a way even helps us work on health goals like decreasing Dr. Pepper and losing weight. If you aren't budgeting what's stopping you?
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