- The budget template they are using doesn’t really reflect their lifestyle or the way they look at their money &/or
- The budget is prepared once, locked in a drawer or a Quicken file and never looked at, updated, or revised again.
So here are my 4 suggestions to address the problems and get you started on a “real world” budget that works for you.
Budget by season not by month
Many budget templates require you to fill in line items with monthy or annual amounts. I don’t know about your house, but few of my costs are the same month to month. Sure you have a mortgage payment or life insurance premiums that don’t change, but really- are those the expenses that cause you to go overbudget?
For example, here in the Northeast, it’s winter for 7 months of the year. So my oil heating bill is top of mind for at least 5 of those months and then my thoughts turn to the electric bill once the A/C goes on. If I tried to follow a budget with the same monthly amount for either one of these all year I’d drive myself crazy. Wouldn’t it be better if you could make sure you had enough cash set aside for those heavy winter months and then spend it somewhere else in the summer?
The first step to creating a budget that works for you is to determine your seasonal needs. What do you do differently in the Fall (think back-to-school clothes, supplies, pay-to-play sports); Winter (skiing, huddling around the heater, Caribbean trip); Spring (landscaping, Spring Break); and finally Summer (pool, family vacation, summer camp).
Don’t worry about what you can’t control.
Many budget templates or cash flow worksheets start with your compensation and go downhill from there. Ignore gross income (for now anyway) since most of us don’t REALLY have a lot of control over our current income once we have a job. It is what it is and if you do want some say in how much you make this year, that’s a topic for another day. The same goes for the next few items in a typical budget worksheet – the deductions for federal and state income taxes. Again, I would argue that what gets taken out of your paycheck each pay period is determined by someone else and you have to live with the net result.
So – this is where your budget starts. NET CASH AT YOUR DISPOSAL. This is what you control and can use to determine how much you can spend. Now I know other items are taken out of your paycheck in addition to taxes, but you do control how much you contribute to your 401k, how much you spend for health care premiums, etc. It’s actually a good idea to budget for these, so you know how much you are contributing for retirement or how much higher your medical costs are going. You get the drift.
Group your detailed line items by priority.
For example – House, Kids, Cars, Trips (am I a bad parent if I just listed my house first? Hey- kids are a lot more flexible when something goes wrong than my house is..).
Under House list EVERYTHING to do with that house. Mortgage, insurance, utilities, repairs, taxes, etc. Look at what your all-in cost is for living in that particular house. This is extremely helpful if you ever decide to move. Or buy a second home.
Under Kids list EVERYTHING to do with the kids. This would include their weekly allowance, something a lot of parents forget to include. Lunch costs, transportation, diapers, saving for college. Anything pertaining to your children in general or one child in particular will help make this budget meaningful and help with choices down the road.
So, these major categories become the horizontal line items in your budget worksheet, with more detailed items underneath & subtotals under each category. When you are done, you will know just how much it costs to live in your house, raise your children, drive your cars and go on your trips. You will know if Fall and Summer are your two big spending seasons. If you dare create a category called “Just for Me” you will also discover how much (or how little) you spend on yourself when no one else is around.
Don’t beat yourself up if you blow the budget on a few things.
You are not going to get this right the first, or second, or even third time you do it. Life happens. But make sure you understand WHY you blew the budget. Was it something you need to budget for next time? Was it a weird, one-time thing that will never happen again but probably should be budgeted for in “The Emergency Slush Fund” (a must-have line item for every budget!). Personally I have found the cost of raising kids confounds me every year. But over time, with the seasonal budget, you will start to know when things are getting off-kilter sooner. In conjunction with this, I would also take the seasonal approach to reviewing your budget versus actual amounts. Were oil prices higher than you budgeted this Winter? Well, you still have time to adjust your Spring or Summer plans to compensate for the shortfall.
The next few blogs will explore some of these budget items in more detail, but to help you get started, I’ve included the first worksheet of a Seasonal Budget Template on the right hand side of the page. Like all budgets, it too is a work in progress…Try it and see if it works for you. And, if you have some improvements, post a comment!