Why Budgets Matter! (And Creating One You’ll Actually Like)

In this post:

• Yes, you need a budget (and you might actually enjoy having one!)
• I’ve maintained the same budget spreadsheet for almost 30 years, and I can send you the template
• There are many budget apps available online you might want to try (but you may not need to!)

“Thank God for the man who put the white lines on the highway”

Quick, name that tune! Unless you grew up around Cleveland in the 80’s, you probably can’t (see the answer at the bottom of this post)

It occurred to me in this haze of local rock reminiscence that budgets are the “white lines” of your entire financial plan!

Think about it. Financially speaking, how do you know at any given moment whether you are “on track”? Whether you’ve veered too far in either direction”? What keeps you fixated on keeping to a straight path without distractions (other than the Pavlov-like Starbucks icon on the highway sign up ahead)?

BUDGETS – Not a four-letter word

Call me strange (my kids sure do), but I feel it’s my job to help you steer around a big misperception:

Despite popular opinion, budgets can be liberating!

I happen to think budgeting is fun. You may not. Even if I can’t convince you that inputting columns of numbers has some entertainment value, I hope to leave you with one thought:

It’s CRITICAL to understand where your money is going if you ever hope to have any control over it. How can you even begin to plot your future expenses, savings, and investments without a roadmap (including the aforementioned lane markers)?

Now, I’ve had people close to me over the years say things like “I make decent money, I pretty much know what I spend it on, and I don’t have time to write everything down. I always seem to have enough at the end of the month, so what’s the big deal?”

Really??

So what if I asked this person how their finances would look if they needed a major home repair a year from now? Would there be enough cash to cover it from their checking account? Maybe they would need to pull from longer-term investments (and forego future growth on these funds)?

Perhaps the cash that could have been saved over that next year will have been spent haphazardly by then and there is no “new roof money” to cover surprises.

Or, on a more positive note, suppose you are working toward buying a house or a new car. Do you have a plan to get there? What is your timeframe? How will this impact other areas of your spending such as entertainment or travel? Will you forego valuable tax-favored retirement savings to achieve this goal?

If the answers to these questions aren’t immediately obvious to you, there a much better way to plan.

Not to get too philosophical, but …

Rather than seeing a budget as a chore, or confining, it can actually be liberating. At the very least, having a clearly categorized budget (preferably by month) gives you

 

Being able to see something before it happens, and having the presence to act or react accordingly before something goes sideways, is pretty empowering, right?

 

The nuts and bolts of setting up a budget – You, Inc.

Think of yourself as a corporation. Corporations have revenues and expenses. They have income statements, balance sheets, and net worth, along with short-term plans, long-term plans, risks and opportunities.

You don’t have to be a business major to understand these topics. Just have a basic sense that money comes in through income, goes out via expenses, and accumulates in various assets, whether they be bank accounts, investment accounts, houses, etc. And you may take on a certain amount of debt along the way.

That’s your entire framework – money in, money out, and where it ends up.

I’m going to focus on how I’ve set up my family’s budget template, again the same one I have used for around 30 years and which I think you can easily replicate. Its longevity speaks to the power of setting up a rational framework that is easy to maintain!

I’m floating today’s post from Great Lakes Coffee on Woodward Ave in Detroit. A big part of the Detroit renaissance in Midtown!

 

NOTE:  The discussion below can get a bit lengthy (but fruitful) if you want to build your budget from scratch. But before I go any further —  I’d be happy to send you the budget template that makes for a great “starter file”. There’s no catch (i.e. no marketing, it’s just a file!), and it will probably save you a bunch of time. I can even help you complete a setup that works for you, with followup advice on maintaining it over time. Just hit me up at Contact Me

The Basics – How My Simple Budget Template “Works”

My success with budgeting, I believe, comes not just from creating a bunch of numbers that add up to a total. The model is a living, breathing document that is (a) set up to tell your story about where your money comes in and goes out and (b) adaptable to changes in your work and life situations as well as spending and saving habits.

So with some very basic spreadsheet skills, you can set up this budget that includes sections for Income, Expense, Account Flows and Account Balances (I’ve also included some visual aids of how each section actually looks).

The contents of each section, and how they work together, are described below.

Income

The bulk of your income is probably from some form of work, whether it be salary, commission, sales of a product or service, etc., so the first line of Income in your budget spreadsheet is what I call “Primary Income”.

Make sure to use the gross amount of your pay (i.e. before any deductions) since this is the best way to track not only the entire amount you earn but to be able to adjust any deductions on separate line items (see below).

You will want to utilize a line called “Secondary Income” that may be subject to similar types of deductions as the Primary Income. While you might think at first you don’t have Secondary Income, consider other ways you may make money like bonuses or side gigs, possibly on a non-regular basis. You want to be able to budget for these separate from your main source of pay but still include them as earned income.

Just under Primary Income and Secondary Income is where you will have Deductions including:

o  Federal and State Taxes
o  FICA (Social Security) Deductions
o  Employer Health Care Plan (your portion, if any), or your own Health Insurance
o  401(k) or Other Retirement Plan (again, your portion that comes out of your pay)
o  Other deductions such as Health Savings Account (HSA) or Flexible Spending Plan (FSP)

Using your most recent pay statements, you can input how much each of these categories represents (or in my personal template, these can also be represented by percentages that can be changed over time – either way is fine).

The result of subtracting these deductions from your gross income is your “Total Earned Income”.

One other line I like to add below Net Earned Income is “Special Income”. This is this once-in-a-while income that is not subject to any of the withholdings from earned income. Examples of Special Income might include one-time cash gifts, tax refunds, or fantasy football winnings (I’m still waiting for that one).

The sum of Net Earned Income and Special Income is a line called “Total Income”. Here’s how it looks so far:

Expenses

While it is ultimately up to you which line items you want to include as Expenses, I feel the key to a clean and manageable budget is to find a balance between being too general and too detailed.

For example, it would not be very helpful to you if your Expenses consisted of only three lines: Rent, Food, Other (although for my daughter living in New York City this might reflect reality!). The risk in this case is that “other” is likely to consist of a wide range of expenses, some recurring and some not, that should be broken out so as to be more clearly identified.

On the other hand, the more detailed-oriented among you might be tempted to nail down exactly what you intend to spend on myriad sub-categories. Common mistakes might be breaking Food into “breakfast, lunch, dinner”, or expressing Entertainment as “movies, concerts, Netflix, square dancing” (I imagine that’s still a thing somewhere).

By all means create line items that best reflect expenses you want to focus on, but I guarantee you that after a couple of months of trying to budget too many categories you could find that getting into budgeting minutiae is time-consuming and not fun (and we’re here to have some fun, right?).

My suggestion for you is to build on these ten or so ”core” categories:
(1) Rent/Mortgage
(2) Utilities
(3) Car/ Transportation
(4) Insurance
(5) Food
(6) Clothes
(7) Entertainment
(8) Travel
(9) Gifts/ Charity
(10) Other Expense

Then play with adding different or more specific lines if you like.

After you have settled on your Expense line items, these sum to a “Total Expenses” line.

Subtracting Total Expenses from Total Income arrives at what I call “Remainder”. This is the amount that is left over each month. Below I will outline how you can either roll the Remainder into current savings, apply to investments, or some other designated savings bucket.

 

NOTE: A whole other topic beyond establishing a budget model is how much should go into each category! That is addressed in more detail in the Budget Guidelines post as part of the Getting Started Series.

That is where I address more specific guidelines on what percent of income is typically spent on housing and other categories, shown under a number of different scenarios.

Account Flows

I learned early on that is important to have a nifty little section that gives you the ability to input where you allocate certain funds.

For example, you start with the monthly “Remainder” described above going to someplace by default. My model has it rolling into a “Current Savings” category (i.e. just my checking account). But you’ve also likely had other flows (either automatic, like a 401(k) contribution, or self-directed) that need to be shown as “going somewhere”.

So in addition to the line for Current Savings, you will want to include lines for other money movements. In most cases, your 401(k) contributions will be directed to a “Retirement Savings” account, plus you can manually input assumptions for amounts you want to direct toward  things like “Intermediate Savings” (something beyond just your checking account such as a money market fund at a brokerage), or “Special Savings” (for house, car, education, travel)

Account Balances

Almost there. If you’ve stuck with me so far, you may be wondering where the “Account Flows” go in your budget.

Here’s where we bring it all together. This section tracks how much you have (i.e. “Balances”), using the same categories from the Flows. So to review, your Account Balances should include:

Current Savings – where you keep your everyday cash (such as a checking account)

Intermediate Savings – a step up from Current Savings where you have physically directed extra money

Special Savings – as described above, a dedicated place established for a specific purpose

401(k) or other Retirement Accounts

Other Investment Accounts

Linking the Flows and Balances is then simple:

Each Account Flow adds to each related line that has a Balance, repeated across the months.

NOTE: The first month of Balances also feed off a “Beginning Balance” input box, so as to have some starting point, plus an “Estimated Total Return” to account for some anticipated investment growth.

Voila! You will now have the visibility of all of your key balances as they change throughout the year.

Maintaining Your Budget

One of the beauties of this model is that while you will go back and input broad totals at the end of each month, there is no need within the spreadsheet to recreate exactly where all of your expenses occurred by line item.

NOTE: I do track expenses in Quicken, so I have a detailed record of all spending, but the budget template is more about setting expectations, monitoring overall results, and adjusting future months if necessary. This micro-level of spending detail, while nice to know separately, does not need to clutter up your basic budget!

The “maintenance” part of your budget is simply a combination of inputting account balances at the end of each month and possibly adjusting future months’ budget for any new information that may have arisen (that big raise, or maybe a new expense that now needs to be planned for).

Actual and Better/Worse Tracking

It’s one thing to establish a budget you are comfortable with, and another to actually track how you’re doing. You will want to create an “Actual” section that is a direct copy of your Account Balances section. Here is where you just put in the final month-end amounts.

It should only take you a few minutes each month to find your checking account balance as well as statement amounts for brokerage and retirement accounts (plus any amounts you know you have put aside into Special Savings).

The Better/(Worse) Section is once again the exact same categories, this time subtracting the budgeted Balances from the Actuals.

For example, if your current actual savings balance for a given month as shown in the example is $2,100, you are “Better” than budget by $417!

This allows you to either grow your savings beyond your original expectations in future months, allocate a little more to the investment accounts, or budget additional expense as needed (or splurge a little, within reason of course).

That’s It – YOUR Budget!

Give it a shot on your own, and let me know if you have any questions!

Again, if you don’t want to spend the time creating your own spreadsheet setup, feel free to send a request to Contact Me. I can provide you with a FREE template!

A Note on Online Budgeting Tools

While my budget has always been kept on a simple spreadsheet, I know there are also lots of budgeting and spending apps out there, and one of them might appeal to you. I have checked out a few, and the common theme appears to be the linking of your bank and investment accounts, with a heavy focus on tracking your spending activity.

I found this summary of 15 of them here at a site called www.gottabemobile.com. In fact, here’s their list:

  1. Mint Budgeting App
  2. PocketGuard Budget App
  3. You Need a Budget
  4. GoodBudget
  5. Mvelopes
  6. HomeBudget
  7. Wally
  8. Level Money
  9. Spendee
  10. BUDGT
  11. Unsplurge
  12. Digit bot
  13. Albert
  14. Your Money Wallet
  15. Why You Need a Budget

Many of these let you set up for free, and it’s up to you whether you want or need additional features that most offer you for a fee. If you give one of these a try, let me know how it goes!

Whatever tool you use, I hope that once you’re comfortable with your budget you now see it as liberation! Next we’ll discuss how to incorporate it into your Planning.

*The answer to today’s Name That Tune – It’s from local Ohio legends the Michael Stanley Band, and the song is “Lover”, from the excellent album “Heartland” that reached number 82 on the Billboard 200 in 1981. I spent much of my paper route money buying tickets to many sold-out MSB concerts!

Thanks again for being part of the GBC community!

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