Budgeting 2012 - Personal Budget - Part 4

This is number 4 in a series of budgeting.


Why Do This or, the 30 second Sound Bite
Before proceeding, why would anyone budget? Well, financial peace of mind is one reason. Another reason is to have the cash to get the things we are really committed to in life. Another is the need for some savings. Everyone should have an "emergency fund." However, it is not possible to accumulate wealth and that includes savings for an emergency fund unless one is willing to budget.

So a first step to budgeting might be making the decision to save some money for a rainy day, or for that emergency fund. What is an emergency fund and why have one? In a nutshell, it's a savings readily available to cover six to nine months of living expenses. It might be larger if you are planning a large purchase in the near future or if you have a concern about job security, or anticipate large bills in the future. Large bills might include medical expenses on the horizon.

Of course, if one doesn't have a budget, then it becomes difficult to predict what those six to nine months of living expenses might be. Sure, you could say it's six to nine months of income and if you spend every dollar you get, that might be the way to go about it. That's the approach some people used in 2008 when they lost their jobs. There were stories in the media about people who were jobless, but continued their life style including the "extras" and spent their savings and unemployment compensation. When that ran out, they lost their homes.

So it might be wiser to determine what your "living expenses" really are. That is, separate the necessities from the discretionary items. A budget will assist you. What you do after that is your business.

I view having a budget as one of those "ignorance isn't bliss" moments. Sure, knowing what one's finances are will crimp one's life style and interfere with the accumulation of trinkets and "bling." However, it can also empower one to make good choices.

Why Do This or,  the Scary Reason to Budget
There is a book out about debt. Debt is a way to acquire things we cannot otherwise own. It was written by Louis Hyman and the book is "Borrow: The American Way of Debt." Mr. Hyman is a former McKinsey consultant, a Harvard Ph.D. and a Cornell University professor. He was quoted recently in the Wall Street Journal in an article entitled "Debt, The American Way." In the article it was stated that the "American Way" is to "Whip out your credit card, if you've still got one, and enjoy it while it lasts." Mr. Hyman's comment was: "We all know it's going to happen. Interest rates have to go up, and when they do—Kablooey!"  The article stated that "Kablooey" is the "precise technical term for where our debt-addicted economy is headed."

I suppose the point of the article was "budget, or perish." Of course, there are those who will scoff at this. Interest rates will go up? Never! These are the same people who also said "home values will go up, and up, and up, forever!" They also talked about "free credit." If you are still listening to them, or if you have decided you can do whatever it is you wish in life by just pulling out those credit cards, then there is no need to continue reading further. You have already made up your mind. However, for the rest of us who don't currently have a budget, or aren't satisfied with the one we've got, this series on budgeting is for us!

Where to Begin Budgeting and How Much Time Will it Take?
It will take some time to budget, but not all that much once you get organized. There are different methods, including a notebook, or a computer spreadsheet, or specialized software, or a combination of these. I prefer a small pocket notepad for tracking my cash purchases, and a computer spreadsheet and Quicken software. Doing this will take about 15 minutes a day, but when beginning the first budget, it will take a bit more time.

Where to begin?  First, assemble all of the bills and make a brief list by category (Utilities, Condo Fees, Gasoline, Automobile Maintenance, Groceries, Household, Dining Out, Entertainment, etc.). Make a second list using predictive information; in other words, estimates.

Doing a budget requires integrity, rigor and honesty. Skipping some information or categories because they make us uncomfortable will sabotage the budget. Deliberately understating the budget will also invalidate it. The purpose of creating a budget is to control one's finances. It's a tool to support and empower us in making financial decisions. In the USA, which is a consumer society, ALL decisions involve the allocation of time or money, or both. So budgeting is vital.

Without budgeting, small financial changes can, over time, accrue and grow into large ones. A budget provides a means to see those changes by comparing actual expenses to predicted expenses. That was the point of my post on gasoline prices. It's amazing how a change of 10 or 20 cents a gallon can add up and inflict real damage on a financial plan. So too with other utilities, groceries, insurance and so on.

I said it takes some honesty with one's self when creating and maintaining a budget. It is intellectually dishonest to pick and choose information to support one's assertions, or to support one's position. Honesty and a willingness to ask intelligent questions is a requirement, as is doing the necessary homework and preparation.

The Tools
As a starting point, I prefer a spreadsheet on a personal computer; but I'm computer literate and an experienced user. A spreadsheet allows me to use formulas to add the daily amounts spent in each category, for the purpose of showing monthly expenses. Alternately, this can be done with paper and pencil and a calculator. A third approach is software such as Quicken. It's better in the long run, but has a "learning curve."

Whatever method you choose, use one that will let you begin quickly and produce results in the first week. You can always move from paper to computer at some date in the future.

If you are interested in using your PC and have no spreadsheet experience, you can get a book at the library but I suggest you consider an adult education class at a nearby community college. If you get stuck it's very helpful to have a teacher a few feet away.

Remember that the goal is to succeed. So choose a method that will allow you to do so. You can always begin with paper, upgrade to a spreadsheet and then to Quicken software. If you decided to use Quicken, then you should also figure out how to back up a copy of your data to a USB flash memory or external hard drive. If you don't the day will come when you will experience a computer failure, and you will lose everything!


The Two Parts of Budgeting - Estimating Expenses and Tracking Actual Spending
In a nutshell we want to estimate how much we'll spend in the coming year, and compare actual spending to our estimate, and we want to do that weekly so we can make adjustments and corrections to our spending. In a budget, there will be things that don't quite fall into line with our expectations. However, we have a lot of control, more than we might realize. We can adjust our energy use by dialing the wall thermostat up or down. We can control which lights are on and use CFL bulbs. We can make daily decisions about eating out or in, and control gasoline usage by combining driving trips. These are examples. You can certainly think of additional ways to control your costs.

By constructing a budget, we are making a decision to control our spending and adjust our way of life to achieve a goal.

By tracking our expenses, we begin a means of seeing the consequences of changes in our spending. In other words, if we begin to exercise some control over our spending, it will show up in our spending and our monthly budget summaries.

Short Term and Longer Term Budgeting - Creating a Starting Point - Step One
Short term budgeting is as easy as figuring how much pocket money I'll need this week, or this month. Longer term budgeting involves planning for years and decades. It's difficult to do it all at once, so I encourage people to start with an annual budget and expand from there. The goal is to succeed, and to avoid being overwhelmed.

To prepare a budget requires information. That means knowing how much money I am spending each month. It also means knowing the specifics of bills that arrive annually or semi-annually.

If I got out of bed this morning and decided "Gee, this would be a great day to do a budget" and I'd never done one before, the first task would be to collect all of those paid bills, cash receipts and bank statements that I'd put in a box under the desk, and also scoop up all of the unpaid bills. So what I'm doing is getting an idea of past history.

Of course, if I spend a lot of cash, that complicates my life, because I might say "According to my bank statements I took $382 out of the ATM cash machine last month."  That's not too useful. Where did I spend that money? If I did that for a year, I'd spend $4,584 dollars out of pocket. That's a lot of cash, and according to experts, a lot of people do budget this way. It's given Suzie Orman and other financial advisers and experts a purpose in life and a nice living, too!

If I were a large cash spender (and I'm not), then the first thing I might have to do is get a small pocket size notepad and begin writing down my daily purchases.

Step Two
After deciding which approach to use; paper or computer, I'd construct a list of basic spending categories. Here is what a basic list might look like:

1. Mortgage Payments
2. Condo Fees
3. Taxes (Real Estate, etc.)
4. Utilities (electricity and natural gas)
5. Automobile - regular expense (fuel, oil)
6. Automobile - other expense (tires, repairs, etc.)
7. Insurance - required (condominium owner, health care, automobile)
8. Insurance - optional (long term care, life insurance, etc. )
9. Medical expenses (Doctor, Dental, Prescription purchases)
10. Charities and Donations
11. Food and grocery (each week, write down the check number, date, amount on a pad of paper and put it in the folder; if cash, then write "cash" instead of the check number).
12. Entertainment (each week, or each night, write down the check number, date, amount and what for; for example, "video rental," "Neighbors Club outing," etc.
13. Miscellaneous (anything else)
14. Debt (make a list of all credit card balances, auto loans).
15. Debt Payments (make a list of all credit card monthly payments, etc.)
16. Discretionary (contracts for cell phones or cable/satellite TV, Internet service, landline phone). 
17. Other folders might include "School," "Children's Activities," "Clothing" and so on. The better the categories and distinctions you create, the more useful the information will be.
18. Don't get too carried away!

Step Three

If you decide to do this on paper, you'll need two notebooks and an "estimate" worksheet. The estimate worksheet will list each category next to each you will put in an estimated amount for the entire year. How to do that? Take one month's bills and multiply by 12 if you have no other way. However, electricity will be higher in summer if you have air conditioning and natural gas bills will be higher in winter if you use that for heat. So if you can, go to your checkbook and use some "real" numbers from summer and from winter as a guide. The "estimate" will be compared to your actual spending. After a year you will have a good idea of what a real annual budget estimate will look like. The first year will be a guess, but as each month passes you'll have more information and a better idea of reality. With that information you'll have opportunities for more choices.

The two notebooks will be a "budget workbook" and a "scratchpad." The scratchpad is for tracking weekly spending. The budget workbook is for comparing that spending to the estimated budget with one page per month. Summing the pages will provide an annual budget and annual actual expenditure amounts, per category.  These can be compared to see you are doing.

Using the "Scratchpad"

In the "scratchpad" put the current date for the week on the top. You will use one page per week. If you prefer to use Sunday as the first day, then use that date. For example, Sunday February 19. Then write the list of categories from top to bottom.

On the scratchpad you will keep track of your expenses for each week. 

Across the top you will have headings for nine columns. The first will have the category, and it will be followed by the seven days of the week and an "Amount" column. For example, your heading might look like:

Category--Sunday--Monday--Tuesday--Wednesday--Thursday--Friday--Saturday--Amount

You can also list the month and date.  

Then in the Categories column, list from top to bottom, the categories from "Step Two," beginning with "Mortgage Payment."

At the end of each day, take a few minutes to put the amounts spent each day by category. You can list check numbers and amounts, or credit card name and amounts, or cash.  A calculator will be helpful.

At the end of the week, add up the amount spent for each category for the entire week and put that in the "Amount" column. Do this for each category. This information will be copied to the Budget Notebook.

Then turn to the next page in the scratchpad and make a new page for the coming week, and repeat all of the steps for the entire week. 

Using the Budget Notebook

In the "Budget" workbook also make a list of categories. This page will be for the current month, and you will need 12 pages for a year. If you prefer, you can use more pages, but some bills come in once a month and it is helpful to have all of this information on a single page. If possible use grid or columnar paper, or use a ruler to make vertical lines so you have space for five weeks on each page. 

Across the top you will have seven rows. The first will have the category, and it will be followed by five weeks (and partial weeks) of the month and an "Amount" column. For example, your heading might look like:

Category--February 1--February 5--February 12--February 19--February 26--Amount

The first week to fall in February is a short week, and so is the last; both are four days in length. 

Then list the categories from "Step Two." from top to bottom.

At the end of the week, after completing the "Scratchpad" take the amount for each category and put it in the  column for the week currently ending.

At the end of the month, add up the amounts spent for each category and put it in the "Amount" column.

You will then know how much you spent per category for the entire month. You should know how much for dining out, grocery, gasoline, utilities, mortgage, etc. 

Dealing with Cash

Cash can be difficult, in particular if you dip into the ATM machine regularly. The thing to do is to get started. How? Create an envelope for each cash category. Put a name on each one and at the end of the day, take the receipts out of your purse or wallet and put them into the envelope. At the end of the week, add up the bills in each envelope and put that amount on the current page of the "scratchpad" for each category. 

Tricks and Tips to Simplify Budgeting
Don't overdue it. Don't make this task so arduous or difficult that it become more of a chore than is necessary. Attempt to come up with a list of categories that will allow to to seperate each days bills and spending in about 15 minutes.

Tricks include using a different credit card or debit card for different types of purchases. I am not advocating spending more. I am suggesting that if one has several credit and/or debit cards, that they be used for different types of purchases. The statements then become categorized records, and this greatly simplifies certain kinds of record keeping. For example:

1. Restaurants = US Bank Credit Card
2. Grocery = Discover Credit Card
3. Vehicle and Gasoline = CitiBank Credit Card
4. Entertainment and Vacations = US Bank Debit Card
5. And so on!

Let me also say, I don't advocate getting more credit cards unless one has taken into account the possible consequences to one's credit score. Getting a new credit card may lower your score!

More Simplification Tricks for Budgeting
I use Quicken and I track all expenditures. That includes two "cash" accounts, one for me and one for my spouse. When we go to an ATM machine, the amount of cash we take is put into that cash account. We then put in the various ways we have spent that. Starbucks is "dining" and so is Alfie's. We attempt to minimize cash purchases, because cash seems to slip through the fingers. $1.99 for a Sunday Tribune, etc.

On the other hand, some people are dangerous with credit cards. If you feel the urge to spend if you have a credit card in your purse or wallet, then you should probably attempt to stick to cash purchases.

How Much is Tracked?
Using Quicken, every dollar spent is assigned a category; for example, "automobile fuel." It takes a few minutes each month to type in the check amounts, and the categories. Spreadsheets are another tool. So too are manual methods such as columnar writing pads and the trusty calculator! That's how my first budgets were prepared. I also save bills in folders marked "utilities," "general bills," "credit cards," and so on. This allows me to check fact and figures easily, should I need to find the original bill. Each bill has the check number, date of the check and the amount written on it. That too helps.

However, the difficult part is predicting cost increases. I use newspapers, the City of Wheaton website, and even the stuff included with utility bills, etc.

Can this process be simplified further? Yes it can. Many expenses are discretionary, which is to say, completely optional. Restaurants, for example. So it is useful to segregate expenses into "necessary," "adjustable," and "discretionary." Once I have my expenses in these different categories, I can then determine how much more I'll spend in 2012 than I did in 2011.

I can tell you exactly how much I spent on gasoline in 2011, and so on.

Notes:

1. I've tried just about every method of budgeting over the years. I currently use a version of Quicken which is supplemented with custom built spread sheets. My first spreadsheets were with "VisiCalc" and later I went to "Lotus 123" and a related product called "Symphony." For business I used these tools and Peachtree Accounting and later Quickbooks. I've always retained a professional accountant. 
2. I have had my share of financial difficulties. What I have learned is that what is important or significant is how we deal with these breakdowns when they occur. 
3. Budgeting provides a means for dealing with breakdowns. Can we avoid problems? Well, we can try, but "bad things happen to good people all the time" is the expression.