Thursday, January 7, 2016

Crunch Time - Making that Budget Stick

This year, my wife and I decided we were going to set a budget and make it stick. There is a lot of friendly budgeting software out there. I have tried many of them and found myself lacking. Yeah, that's right. The software works great but I don't want to use it.  Budgeting software will happily tell you what you spent, but it doesn't tell you what your goal should be. The problem with budgeting software is, without a goal it is reactionary. Which is where we are.

Where most budgeting software shines is categorizing expenses. For years, my wife and I sat down looked at all the money we spent and were perplexed, confused and even a little ashamed. That killed the budget right there. If you are demoralized at the get go, nothing will change.

We wrote down your top ten list of things that must be paid. For us, it looked like this:

  1. Housing
  2. Autos
  3. Gasoline
  4. Natural Gas
  5. Water 
  6. Electric
  7. Groceries
  8. Insurance 
We need a house and food, we to go to work, and insurance, lights, heat, gasoline, and water make those cars and homes function. Those are the musts. 

In the next category, we listed the things that we Should do.
  1. Credit card bills
  2. Medical spending
  3. School loans
We racked up a lot of debt on credit cards and there are certain medical needs in our household. College placed my wife and I in wonderful jobs, so loans are important too. 

Now, you may question this whole category because medical spending can keep you alive and not repaying debts can be disastrous. Both are true, but if you skimped on these items, next Tuesday won't be the end of the world. Granted, it could feel like it but it really wouldn't be. 

Looking at these numbers is depressing. It is a lot of money. We fired up our budgeting software and sucked in all of our income from our bank's handy export tool. This was happier... for a moment. 
  1. My income
  2. My wife's income
  3. Hobbies
  4. Gifts
The hobbies and gifts were shocking. We found that cash gifts tended to be fairly routine and my hobbies occasionally generate funds. These two items were a couple thousand dollars. I knew this, but my wife didn't. For many years, I have earned a couple of 1099 forms and I am particularly careful to note these on the taxes as I don't want a hobby to turn into a nightmare. 

My wife questioned exactly how we could burn through all of our income, plus "found money" and have nothing left. I could sort of see the answer but couldn't explain it. 

That is where the last category comes into play. I printed all of the purchases that did not fit into the above schema. In looking at it, we noticed A) it was more than the first two categories combined and B) we had no idea what most of it was. The killers were Kmart, Target and Wal-Mart. Think about it. Pull out a random charge at a department store, wait six months and try to name what you bought. You can't. 

This is what gave us a goal. We subtracted Musts and Shoulds from our income. We looked positively peachy. We budgeted $30 for each of us for discretionary spending: coffee, lipgloss, whatever. We decided that would not be tracked aside from the $30 we set aside. 

We then plowed through the massive lists of transactions and found all of the expenses that the store name described the nature of the purchase. Haircuts, body products, shoes, etc. We were overspending a bit, but not that much. It was everything that we could not identify that was killing us. 

If it had a purpose, we kept it on a list of Wants. We made an agreement to do all of these expenditures on a single weekend, together. We budgeted $500 a month for five people. We are just coming out of Christmas, this number should be good until January or February. It will need to be adjusted up, because you can't really buy an outfit, shoes and a haircut for less than $100 per person. But on average, it might be good. 

Everything that was left, is going into savings. It doesn't matter if it is $1717.00 or $17.17. The point is to pay all of the bills and still grow our savings. We used a spreadsheet instead of software, we can share it online. 

My wife is slightly bemused that she is REQUIRED to spend money on certain things which are a direct benefit to her, such as hair care and clothes. She is also mystified that some expenses are not being tracked from her $30 dollar allowance. With savings, we will be able to spend more quality time together. All of these are of great importance to us. Someday, we will have the funds for a vacation and this year, Christmas won't hurt as much. 

The killers of budgets and plans is not realizing that somethings are more important than others, but often seemingly trivia things can really hurt. Budgeting a dollar for a pack of gum is better than being a dollar short on your car payment. If you plan, you can get ahead, even if it takes a long time. 

In the next few days, I will address what to do when things go very wrong or very right.