There is no one giant step that does it. It’s a lot of little steps.
~ Peter A. Cohen
Update: 6 Remedies for a Debt Hangover is mentioned in today’s Money Hacks Carnival #100 @ The Ultimate Money Blog. Thanks Mrs. Money!
Over the past 2 years, I have had to rework our budget a half a dozen times or so, in addition to running various budget scenarios for potential job changes. So this stuff is pretty fresh for me. For what it’s worth, this post describes how I handle our budget. I don’t decide on percentage allocations up front. This might work for someone just starting out, but most of us have spending commitments that are well-entrenched. Rather, I start by looking at our net income and all of our expenses in detail.
Tools of the Trade
- Quicken: I use Quicken categories to track our income and expenses now, but I used to do it with a coil notebook, a pencil, and a calculator. The software also allows you to create a budget, track bank accounts, and plan savings.
- Paper, Pencils, & Calculator: I still use these tools a lot when I’m looking at various tax, savings or spending scenarios. I tend to organize my thoughts best on paper and with a pencil in my hand.
- Computer Spreadsheets: Even though Quicken provides numerous reporting options which I do use, I still use a computer spreadsheet to compose an overall annual look at our income and expenses. I just think it’s a bit more streamlined and it works for me.
What to Do With the Numbers
Once I get a picture of how our income and expenses compare, I go to work figuring out ways to:
A. Make Sure We Are Spending Less Than We Earn
This is the whole point of budgeting. If our income minus expenses yield a negative number, something’s got to change. Debt is not an option. Spending is going to be cut somewhere.
B. Make Sure That Income Is Going to the Places That Are Most Important to Us
- Look At the Big Stuff First: I usually try to organize the spreadsheet so that the largest annual expenses are at the top. I double check to make sure these expenses are as lean as I can make them. For example, I may go over our insurance coverage to make sure we are not paying for things we don’t need, that we are not paying finance charges for our payment frequency, and that our deductibles are maxed out. Groceries are always one of our largest expenses. I make sure to track (in Quicken) our spending habits, as our grocery expense trend has gone a bit parabolic (straight up) over the past couple of years. Those of you with sons in the 10 plus age range know what I’m talking about!
- Look At the Mortgage Payment: Can I increase the payment or payment frequency? We already pay weekly, so the latter is not an issue anymore. If you have read some of my previous posts, you know that I actually reduced our previously accelerated payments in order to balance the budget with our new income situation. If the mortgage is up for renewal in the coming year, I will start looking at various interest rate scenarios and their effects on our payment and budget. We hope to have the mortgage paid off before we need to renew it again in 2013.
- Look at Discretionary Spending: If I need to cut expenses, this is probably the first area on the chopping block. Our 3 largest discretionary expenses are probably dining out, music lessons & supplies, and “beverages”. For us, dining out rarely means going out. We usually order pizza or some finer food from a good restaurant for take-out. This way, we enjoy some nice food, I get a break from cooking, and we don’t pay for things like drinks that are marked up a ton in restaurants. Speaking of beverages, Mr. Cents and I enjoy sharing a bottle of red wine on the weekends. Rather than European or Southern Hemisphere vacations, this is how we splurge. Recently, we have been buying $10 rather than $16-$20 dollar bottles. (There really are some pretty good ones!) Our 2 older boys are very talented musicians (not that I’m biased
), so I would have to say that if cuts were made, beverages and dining out would get chopped before we ever touched the music lessons. (Incidentally, Mr. Cents gave up his music lessons so that the boys could continue theirs when the waters got rough last year.) - How Much Are We Saving? To be honest, we may not save much of anything this year, depending on where our income is. In The Balanced Money Formula from All Your Worth, accelerated debt payments count as savings. We probably won’t be paying too much extra on the mortgage unless our income allows it. But we have no other debt, and we have saved quite a bit over the past couple of years, so we can afford to go lighter on the savings for this year until our income picture clears up. I recently wrote about Our 2010 Financial Plan, so I won’t repeat the details here.
How to Handle Cash?
We do tend to pay for most of our purchases with a single credit card to collect the points. We never carry a balance. We used to budget a certain amount each month for cash, and I usually wouldn’t track that money. Cash really can be difficult to track. But when things got tight last year, I decided to find a way to do it. I set up a “Cash Account” in Quicken where I track cash spent. It is a bit of a pain to enter every expense, but I was already entering most of them in Quicken anyway, and this really gives me a better picture of where we are spending our money.
We have begun to take out less cash lately and only use it for purchases that are really too small for credit or debit cards. So far it’s working out OK. It just makes a little extra work, but it’s worth it for the peace of mind it gives me.
Revisit & Adjust as Needed
Depending on how our cash flow is proceeding, I will usually look at the budget monthly and/or quarterly. I have a monthly budget report that I can review in Quicken. I also have a report that lets me know how we are doing on an annual basis. For example, I can tell whether the clothing I bought for the boys this month has put a serious ding in their annual budget, or just a scratch. We do put a lot of our expenses on our credit card, so if I’m noticing that cash is getting tight when it comes time to pay the bill, I know I need to look at the budget more closely.
It’s also important to update your budget whenever something in your financial picture changes. If you begin or cancel a subscription, change jobs, switch internet, insurance, or phone providers, or if your property taxes are adjusted, you’ll need to revise your budget. Similarly, if you needed to tap your emergency fund, you’ll need to budget in some savings to top it up again.
This is just one person’s approach to budgeting. It’s not for everyone. Do you have any good budgeting tips or tricks to share?
