Budgeting 101 - Part One
I left you last time grabbing a cup of coffee and writing up a list of expenses... and totalling your income for the year.
Tonight we're going to categorise them very simply and very easily, and then start tracking and thinking about allocating amounts against them...
We personally use four bank accounts, and split our budget accordingly; however, it is just as easy to split it into three categories, over three bank accounts. So I will keep it as simple as possible with three categories:
Number 1 Category (or your main Cheque Account):
This is going to have your day-to-day expenses, for us it includes:
Groceries (this covers cleaning stuff, toiletries, pet food, as well as food)
Pocket Money (kids and adults)
Family Money (I will explain more about this later)
Number 2 Category (or your Bills / Utilities Account):
This is going to have your regular bills and not-so-regular bills (these are NEEDS and not wants):
It is out of this account that you set up your regular AP's and Direct Debits, and also where you put money aside for those not-so-common expenses:
Rent / Mortgage
Bank Loans / Credit Card Payments / Car Payments etc
Car Expenses (rego / warrant / repairs)
Number 3 Category (or your Savings Account):
This is where everything else goes that hasn't been allocated, and once you know the sum of this - you then split it up, and allocate what you consider appropriate amounts against different categories; these categories are more in-line with WANTS or variable/unknown expenses such as medical.
So for us - we allocate to categories such as:
Hair & Clothing
Kids / Adult Activities (sports / subscriptions etc)
Savings for a holiday / new appliance
Home Renovations / Extensions
Your lists will be different to what is above, I am basing these lists on our budget, but every family has different needs and wants... So go through your list, and write 1 to 3 against each item you have listed.
Once you have figured this out - get 3 clean pieces of paper and write each list on a separate piece of paper, just so you can grasp exactly what you have in front of you, and have more scribble room 😉... But now comes the hard part:
Go through and start allocating/guessing amounts against each one - taking into account your weekly/fortnightly income, you CANNOT exceed this... When you come to things like rates and insurances, anything you pay less regularly - take the entire years figure, and then split it up either 52 times (if you get paid weekly) or 26 times (if you're on a fortnightly pay cycle like us), and write this amount next to it. Start with Category 1, and follow this with Category 2 - do NOT start Category 3 until you have completed the first two.
Once you have allocated amounts against each item in Category 1 - sum it up, and put this figure at the bottom of the page. Do the same for Category 2, and then add them together before you start on Category 3...
This is where reality starts kicking in - look at the total amount you have allocated to categories 1 & 2, and then look at your total weekly/fortnightly income, and see how much you have left. What you have left is all you can allocate in total to Category 3 - so be careful how you split it up, and make sure you always put against the more important wants first (such as medical, clothing & hair, birthdays & Christmas); there may be some things you have to forget at this point.
BUT - don't lose heart, and give up on me yet... there is still hope that this may not be as dire as it looks right now.
Currently - you have nothing set in concrete; these allocations are guesses (educated to your circumstances as they are)... So, your homework over the next few weeks is to track your spending and place each transaction against an allocation you have made.
At the end of each pay period - take a look at what you have spent against each area within your budget, and slowly start to make adjustments to suit your requirements more realistically. The adjustments might need to be in what you spend in a certain area (groceries are my weakness, for example, even now I have to work hard to keep within our budget), or you may be able to adjust how much you put aside. An example of this for us was power - I had initially allocated $150 a fortnight to power, but we hardly ever go over $200 a month, so I was able to cut this down to $100 a fortnight and put the extra $50 against other area's.
This is going to show you your true spending patterns 😳! Some of us (I am included in this) can get quite a shock when we're faced with the reality of our spend-thrift ways! However, it is worth the hard work and shock; because once you done this exercise a few times, and got a really good handle on your budget - things flow much easier, and life is less stressful.
Keep in mind, there are things you can't change (of course) such as your regular payments from Category 2 like rent / mortgage etc, and also your more irregular expenses - rates & insurances are a good examples here, keep putting your allocated amounts aside for these expenses; do not adjust it yet, nor spend it. The relief of knowing the money is there when that big invoice arrives, is like sweet sweet honey!
If you want more specific questions on how I do this personally, you're welcome to email me at: email@example.com and I will do my best to answer you as well as I can.
This is quite a lot to take in, and it will take a while to get a handle on it - I will go more into detail next time on how it works on a day-to-day basis in our lives, and how we run it. No one is perfect, I still overspend at times, and have to 'borrow' money from another category to cover for it... it's not about perfection, it's about looking after your money and your future to the best of your ability. It takes time to get a working budget that covers everything, and is flexible enough to make you feel like you have room to be a little spontaneous at times. So don't give up; keep refining it until it works for you!
So don't just add it to your 'To Do' List; go do it 😉