Budgeting

Budgeting = Balancing income & expenses

Budgeting = Balancing income & expenses

Budgeting is not the most appetizing subject. It is akin to having to eat brussel sprouts. And like eating brussel sprouts, it is good for you!

What is Budgeting?

The practice of establishing spending and savings targets in a controlled, quantitative manner on an annual basis.

Why is it Important?

Trying to save money and control your spending without a budget is like trying to control your weight without a scale.

Spending falls into two broad categories – discretionary and non-discretionary. Non-discretionary include required or necessary living expenses such as rent, mortgage, utilities, auto, insurance and groceries. Some examples of non-discretionary expenses include travel, dining out, entertainment and purchase of non-essential items.

Budgeting offers a tool for controlling spending and thereby enabling saving.

Without the discipline of budgeting, the probability of spending exceeding income is higher and therefore the risk of falling into debt is higher.

In addition to the following information, I have created a 7 part YouTube series on personal budgeting and financial planning.

I have also made an Excel budget template available for download.

The Process of Budgeting

General

  • We use 12 months for our budget time frame. We line our budget time frame up with the calendar year (January – December). Note that a shorter time frame such as a quarter can be used. Budgets will need to be created more often but that can be a good thing.
  • A budget is a plan, i.e. the numbers are targets or goals.
  • Historical data, augmented with any known new information, provides a logical way to derive budget targets.
  • Actual results are recorded separately.

Income

  • We rely on history and any new information that affects a particular source of income.
  • If you work, your pay check records or tax records should provide income targets.

Expenses

  • We categorize expenses by spending. For example, we have expense categories for auto, medical, utilities plus several others.
  • To come up with our monthly budget estimates we first start with what we spent last year. This works very well with fixed and some variable cost expenses.
    • If we know of any planned increases, we increase the budget estimates. Or, we may simply apply an inflation factor.
  • Then there are anticipated or new expenses that apply beginning with the new budget cycle.
    • One way to come up with an estimate for a new expense is to get a quote from a supplier or vendor.
  • We then enter our monthly income and expense estimates into a simple Excel spreadsheet (Click Here to download). The format looks something like this.
Exp Cat 1 Exp Cat 2 Total Expense Income Est. Income – Exp
January
February
March
Totals

 

Tracking and Using Actual Data

Unlike budgeting where you have to come up with estimates, collecting actual income and expenses is straight forward. There are several sources of the actual amount that we spend – employer generated records, receipts, credit card statements, check book registers and financial institution records. We use a separate spreadsheet to record our actual expenses and to put them into the appropriate category. Actual expense data can be captured as you go, monthly or even quarterly depending on your budget time frame and how much time you have available.

 Tying it All Together

This is the point in the process where you analyze and learn so that you can make good financial decisions and make adjustments.

We use another spreadsheet to compare our monthly income and expenses to our budget estimates. This tells a couple of things. First, how well did we manage to our targets, second how good our budgetary estimates are and third whether we have money available to save or whether we’re operating at a deficit.

Summary

  • Budgeting is an essential practice.
  • It requires financial literacy, discipline, knowledge of and access to spreadsheet technology and commitment.
  • Using a budget will enable you to manage your finances instead of having them manage you!