Budget. I’m not sure there is a more polarizing word in personal finance. Some people cringe at the mere utterance of the word. Others give it a more friendly name like “spending plan”. Both hated and loved, a budget is an important financial tool that can be used in a variety of ways to guide you on your financial path. Whether or not you currently use a budget, it’s worth discussing when having one might be a good idea.
Ways to use a budget:
- Set a savings goal
- Establish a financial baseline to set an emergency fund goal
- Monitor your overall household spending
- Monitor specific categories of spending
I have used a budget in all the capacities mentioned above. Here is a brief walkthrough of how my family began using a budget and how we use one now.
Why we started using a budget
Shortly after getting married, my wife and I combined our finances. We each have our own bank account and our bills and common household expenses are paid from a joint account. We didn’t have any immediate goals with our money so we didn’t keep track of our spending.
About four years into our marriage, we had two events in our lives that lead us to the conclusion that we needed to put aside some significant money. The first was a home renovation project. We had been saving for a few years for the renovation, but as the time drew near and we began to solidify the project, we decided we needed to put aside even more money. The second was our dreams of starting a family. Having kids was not going as easily as we hoped and there were a lot of unknowns that come with big price tags.
How we got there
To begin this savings plan, I needed to know both our income and expenses. Since we pay nearly all expenses via our joint credit card, it was very easy to track expenses. I just downloaded our expenses over a 3 month period into an application on my Mac. The application I used several years ago is abandoned, but I’m currently using an application called Money. You could use Mint to do something similar for free. I then categorized each transaction into one of 54 categories and extrapolated those values over a 12 month period. I also looked through our bank and credit card accounts beyond 3 months to find any bills that were not charged monthly. This identified expenses like insurance, taxes, pest control, and other repeating but non-monthly charges. Those costs were also extrapolated over 12 months. All expenses were divided by 12 to establish a monthly cost and this created our monthly budget. I easily calculated our monthly income as our paychecks are both deposited into our joint checking account.
After pulling together these values, my wife and I talked about what our goals were for our money. We discussed what categories were less important to us and what we could either cut or eliminate all together. Any money left over from our monthly budget would be set aside for savings towards the two main goals I mentioned above. The vast majority of any bonus money we received as part of our jobs would be saved towards these goals as well.
Where are we now?
Though our immediate savings needs for starting a family and our home renovation are no longer relevant, we still stick to a monthly budget. Each month I import our credit card transactions into Money and categorize them using a combination of import rules and manual categorization. As we made progress towards our goals and created new ones, I’ve pared down the 54 categories to 32 in an effort to save time. With two little ones at home, I don’t have a lot of free time!
Each month (or so), my wife and I sit down and have a “money talk” as I like to call it. We look over our bank accounts and discuss any upcoming large expenses or potential deviation from our budget. We currently use Personal Capital to aggregate our various financial accounts. This allows us to use a single app to get a quick overview of our financial picture. We spend about 10-15 minutes each month during this “money talk” and it gives us both an opportunity to discuss any new goals we have or any questions related to our finances. It doesn’t have to be anything formal, but the act of engaging your spouse in the household finances can lead to an increased feeling of ownership by the person who isn’t involved in the day-to-day handling of the finances.
Free Budget Spreadsheet
You can download a copy of the Budget Spreadsheet I created from the Tools page. Take a look at the Instructions sheet for directions on how to use the spreadsheet. Feel free to edit the spreadsheet as you need, but I think it’s a good starting point. I hope you can find some value from it!
As noted above, you can use a budget for a variety of reasons. I personally like to know where we spend our money which let’s me know if we’re on the right track financially and saving money toward our goals. Savings is nearly our largest expense each month!
Do you use a Budget in your family? I’d love to hear any thoughts you have about using a budget, particularly if it varies from my usage.
Image courtesy of: Pexels