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If you haven’t read Color-Code Your Spending, do that first.
Color-coding your spending habits was to show you just how you spend your money. Depending on how many colors you chose to use, you broke down your expenditures into a number of categories so you could see where your money was going. You can now see what categories are costing you most per month, and what categories are variable over the year. Now I’ll tell you how to make a budget with them.
Your current spending
Chart out your categories over a good period of time. Six months is good. List your categories and month-by-month expenses for each category over the six months. See how the expenses vary over time in each category, if they do. It’ll look something like this:
- Food/drug $423.22 398.85 421.89 501.55 452.14 380.73
- Utilities $175.87 167.66 166.45 171.44 168.72 159.42
- Entertainment $136.55 136.55 197.84 462.99 136.55 276.99
- Home $800.00 950.00 800.00 800.00 800.00 3100.00
- Transportation $550.00 600.00 550.00 670.00 550.00 600.00
Looks like your food and drugstore bill is pretty steady, and you could take an average of it and hardly notice holding to the average figure, which would be about $430 a month.
Your utilities would also be not very variable, so you could put about $170 down for a safe monthly estimate.
Entertainment is more variable. Your satellite TV service is the basic $136.65 right now. In the third month you had dinner out, in the fourth the whole family went to a major league ball game, and in the sixth month the two of you went out to a spectacular dinner for your anniversary. You can certainly plan on the TV bill every month but clearly other things happen more sporadically. Yet you want to have some money for them.
These irregularities also happen in Home and Transportation categories. The house (and escrow account) makes your mortgage, insurance and property tax very steady over the year, but you needed your furnace serviced once and then your 26-year-old refrigerator caught fire and shot ice all over the kitchen. Since that is reprehensible fridge behavior, it got replaced. So your Home category may or may not want to include big replacements.
Ditto the Transportation category. Your car payment and gas are pretty constant, but occasional oil changes and the annual inspection and registration raised the bill somewhat. And when/how do you pay your car insurance? Is it a monthly bill, or quarterly, or annual for you?
Sporadic expenses, solved
There is a way to handle the expenses that only come once a year or quarter, without allotting a lot extra to a category. That is to save the money separately with a monthly payment to a savings account, and draw it out when it’s needed for the car insurance, registration, big brake job, new refrigerator, or blowout at the ball park.
How do you know what’s enough? Simple. Add up the known sporadic expenses, round up to include some padding or fun, and divide by 12. Now you know how much to put away each month to pay for the odd things.
And now, make a budget.
Here we go. We said we could use $470 a month for food and drugs, and how about $140 a month for TV because you know those charges keep creeping up. Your highest utility bill was $175; that might be the safest choice. Home is $800 a month and your car is $600 a month when you need service, and you really ought to run it through a car wash and keep the wiper blades up and such.
Finally, we have expenses that don’t happen regularly but we have to deal with them, so let’s say $150 for the furnace, $2300 for the fridge, $1200 for car insurance for the year, and $120 to keep it legal with the state. Sure, you don’t have a fridge go bananas every year, but some year you’ll need the roof worked on, or the washer will go walkabout, or the plumbing will back up. That’s part of the charm of owning your own home.
So let’s put this together and say, gee, that was $3770 plus the fun things we did, so $4500 with all, for 6 months. What if, to be sure we cover the year, we go $6000, or $500 a month in the savings account.
Now our draft budget looks like this:
- Food and drug $470
- Utilities 175
- Entertainment 140
- Home 800
- Transportation 600
- Savings account 500
- Total $2685
Now, that wasn’t so bad. You had the money to do this so far. If this doesn’t fit, though, you have things in front of you to look at so you can see where you can cut.
Clearly I’m missing some very important categories, such as health care, clothing, hobbies and vacations. You know what else you spend your money on. You’ll have tracked them and can do this process with them and know what you’re doing now. Then you can tweak to make things work better.
Tips and tweaks
With a rough budget in front of you showing your current spending and ways to sustain it, you have the opportunity to change what doesn’t work for you.
Suppose you pay off your mortgage, and no longer have an escrow account! Now you have to save for your home insurance and property tax yourself. Time to dig out the tax bill and insurance bill and find out the due dates. Then you’ll need to add to your savings line enough money per month to cover those when they come due. And then, no more worries.
A friend of yours tells you about a thing she plugs in the back of her TV that brings her so much programming over the Internet that she doesn’t miss a thing, so she quit her satellite service. You find out the stick thing is like $50 and she pays $30 a month in subscription fees, which beats the living daylights out of $140 a month. Your Entertainment category changes to make sure you have the TV you want and money for more fun too.
Why bother? I’m doing OK
If that’s the case, congratulations on being well off! I started this when we moved and started a business in a totally new place with limited funds and low income. It comes from hard times, when wind blew through the house and made the stove hard to light.
We couldn’t keep the business going due to regulatory changes that killed off our revenues, but we’re still here. The wind doesn’t blow through the house unless we open the windows now, and we’ve replaced some systems in it totally, kept two vehicles running, and us alive. It’s been working for the better part of 30 years. So I figure if it can work for us, it can work for anybody.
How did you come up with your budget? If you haven’t got one, why not?