My Simpler Budgeting Strategy

We’re moving through the process of buying our first home (more on that in a few weeks), so it was clearly time to give our budget an overhaul. Through the process of re-working our budget, I discovered a really effective methodology that combines a number of different components into a single, simple budget.

My new budget consists of four basic components:

1. Fixed Monthly Expenses
2. Variable Monthly Expenses
3. Known Irregular Expenses
4. Monthly Transfers

I think that one major reason budgets fail is that they try to treat different expenses in the same way: plan, spend, track, control.

This budget recognizes that it’s not necessary or even desirable to do that. Some expenses can take care of themselves, some need special attention, and others a little pre-planning or automation.

Let’s start with the most obvious:

Fixed Monthly Expenses

Column #1 (in my spreadsheet) contains everything that is monthly and is either identical every month or changes so little as to not make a difference in my planning. Some of my own examples include:

• My mortgage payment
• Car & student loan payments
• Monthly health insurance premiums
• Gym membership
• TV/Internet service
• Dropbox subscription

List the transactions out individually rather than in budget categories. (for example, if you have two insurance payments to Blue Cross, write down each one on a separate line). This makes it easy to transfer the information into other software and also makes adjusting your budget in the future a breeze.

A simple SUM formula adds everything up and I get my total monthly cost for all fixed expenses. From there, here’s the plan for these recurring expenses:

1. I will enter them in Quicken with the respective draft dates (most are automatically paid) so that they’re also automatically entered in my account register AND I get a forecast of my balance for the next 30 days.
2. I will review them every few months to see if there are opportunities to reduce costs, cancel subscriptions, look for cheaper alternatives, etc.

That’s it–this category is set up and ready to be left alone for the time being. There’s no need to track these expenses every month or to make sure they’re  not affecting the budget in a bad way–they will be the same until we change them.

Monthly Variable Expenses

Last week, I wrote about focusing on the metrics that are important to you and forgetting about the rest (read the entire post here):

“Personally, I track only three things–net worth, which tells me if I’m making progress, checking cash flow, which tells me if I’m managing my accounts well, and my food budget, which has historically been a problem area. While everything else is also relevant, it’s not nearly as important as these three numbers. If I’m doing well here, chances are I’m doing well elsewhere, too.”

That’s a good start to working with variable expenses–the only part of your budget that should really matter on a daily basis. Everything that occurs monthly, but is either controllable or varies month to month goes in this category. Here’s what’s in mine:

• Groceries
• Gasoline
• Entertainment
• Home Supplies
• Electricity
• Child Expenses
• Gifts

Each has an initially defined budget based on historical data. Adding them up, I get the total monthly cost for this column as easily as I did with the fixed expenses, but this category will require a little extra work:

1. I set up these categories (and only these categories) in the Quicken budget screen to track as part of my active budget.
2. I can track the categories individually and as a whole. For example, I might choose to spend $100 on entertainment this month, but if I spend $0, I might use that extra money toward stocking up on home supplies instead.
3. Alternatively, you can track each category individually month-to-month like you would with an envelope budget. This works best for widely variable expenses, like the electric bill or gifts, since “down” months can give you a surplus for very active months.

It’s important to still keep things simple with this category, but also to recognize that it’s the one where you have and need the most control after you leave the budget planning stage. Decisions in the other categories should be made when you plan, but decisions in this category are ongoing throughout the year.

Known Irregular Expenses

This is an area of your finances that could be cause for very little stress if handled correctly. Unfortunately, most of us do a very poor job of preparing for expenses that don’t come up monthly but than are often much larger than your average trip to the grocery store.

First, a hat tip to Matt Jabs for coming up with the idea. Here are a few things that made it to my own irregular list:

• Auto insurance payments
• Non-monthly health insurance premiums
• Warehouse club membership
• Veterinarian bills & dog medicine

You get the idea…these happen every few months or as little as every few years, but you know they happen and you ought to get ready for them. You can budget for these, you can even create little virtual envelopes for them in your software system, but the very best way I’ve found to make sure you have enough money when they come around is a separate account.

Call it an “irregular expense fund” or a “sinking fund” or whatever else you’d like, but the idea is the same.

1. Add up the yearly cost of everything on your list and divide by 12 to arrive at the “monthly cost” of these expenses.
2. Make an automatic, non-negotiable transfer once a month (or one-half of it twice a month, as I prefer) to a separate savings account.
3. When one of these expenses hits, use the money from savings to cover it.

This simple process turns an often-stressful experience into something you’re completely prepared for in advance. No stress needed!

Monthly Transfers

The fourth and final category are your monthly transfers. These are largely things that help to increase your net worth, so they rightfully deserve their own spotlight–savings transfers, retirement and college investments, health savings account contributions and more are part of this category. Funding your emergency account should be part of this group so that you don’t get surprised by the unmentioned elephant in the room–unknown irregular expenses.

List all the transfers you make throughout the month and add up the total to get a monthly figure. This completes the fourth column.

The key with this category is just to make it automatic and thoughtless. Once your amounts are set, don’t mess with things by trying to remember to make transfers every week or adjusting the amount every time. If your income is variable, make a small amount automatic and transfer any excess income to your savings at the end of the month–at least you’ll have a head start.

Putting It All Together

Run a simple addition formula that adds the four monthly column totals into a grand total–this represents your total expenses for the month including all fixed expenses, variable expenses, savings for irregular costs and transfers.

Compare this to your monthly income and make sure that there’s enough income to actually cover everything you’ve planned for. In an ideal world, income and total expenses should roughly be equal, since your spreadsheet will account for any transfers to savings of excess money.

Unless you have a lot of expenses, everything should be visible on the same screen in your spreadsheet. Here’s an example of what this could look like when you’re done:

This should be a very easy budget setup to review at a glance, share with others in your family, and update in the future. It should also lend itself very well to making you understand what you need to automate, and what really makes a difference and needs your focus and attention.

Let us know if this setup works well for you!