If you’ve never written your annual expenses out on paper or plugged them into a spreadsheet, you can’t have a good handle on your annual budget. You may be paying all your bills, but if you take the time (one time) to make a physical list of your expenses, you may find out things you never knew about your money and lifestyle. Now’s the time to develop an annual budget.
A few years ago, I watched as a friendly repairman put the finishing touches on my deader-than-a-doornail television. As he packed his tools, I pulled out an envelope marked “Household Repairs” from my desk drawer. It contained enough money to cover the job.
“You’re an envelope saver,” he smiled at me. “I wish you’d teach my wife how to do that,” he added, as he shook his head.
His wife, he told me, came from the “I have checks in the checkbook, therefore I have money” school of thought. Faith is one thing, but I’m not sure God covers overdrafts.
I’ll admit, I don’t identify with people like that. I’m a proud envelope saver-one of those people who dutifully budgets out the weekly paycheck into neat envelopes representing future bills. I come from a long line of envelope savers.
You don’t need a stack of envelopes to budget. In fact, the smart saver will keep his/her money in an account earning interest until the bills are due, then transfer the right amount of money into the checking account just s the bills need to be paid, all the while keeping close records on what is being spent.
However, most people, including me, don’t see a big pile of money in an account as being made up of “Gas and Electric Money,” “Telephone Money” and “Rent Money.” For most people, a big pile of money means the ability to buy something big that heretofore has not been in the budget. When it comes time to pay the Gas and Electric bill, the money isn’t there. It’s rolling around (figuratively) in the wide-screen television set you splurged on. It’s true you don’t need a stack of envelopes to be a smart saver, but you do need a plan.
Make a list of all of the things you spend money on in a year’s time. Go beyond the typical entries: Rent, Telephone, etc. Include smaller items such as Publications, Cable, Travel, Medical (payments not covered by insurance). Have a Miscellaneous category for very small items that crop up throughout the year.
For the initial phase, I use a ledger pad to keep track. You’ll be using four columns. In Column One, write “Expenditure.” In Column 2, write “Weekly.” In Column 3, write “Monthly.” In Column 4, write “Annually.”
Then, plot in amounts spent under the appropriate category. For example, utilities are generally paid monthly, so determine the average monthly amount you spend. I added up my bills from the previous year and divided by 12. If you didn’t keep the receipts, call the utility company and ask them for an annual figure. (Image that a total stranger knows more about your utility spending habits than you do!)
Some bills, such as life insurance, are paid annually or semi-annually. Plot the amount under the Annual column. By the end of it all, you should have three columns of numbers reflecting how much you spend on each category weekly, monthly and annually.
The most important part of this is to be brutally honest about your spending. I found that while I listed the amount of my children’s school tuition nearly to the penny, I never seemed to add in the amount spent on summer recreation and camp programs. This summer, it amounted to over $700, an amount that if not anticipated can throw off the budget substantially. I know my own fault here. Tuition eats up much of our monthly income, so boosting the figure by adding in the camps and recreation figures is not something I can mentally handle…so I sometimes avoid putting it down on paper. What are your sore spots. The budget is meant to help you. It won’t be shown around at family gatherings or printed in the local newspaper. No one but you has to know you spend $500 a year on candy. (For right now you only need to be concerned with what you spend, not how you spend it.)
Make sure you include Savings, IRA, College Funds and the like in your expenses. At some point you will need the money designated for savings, so it is an expense that must be considered as important as your weekly grocery bill.
Also, and this is where planning comes in, be sure to budget things you want. If travel is important to you, by all means, treat it as a definite expense rather than as an “extra.”
By the end of it all, you should have a clear picture on where you money goes in a year. You may not like what you see, and before you even list your income sources, your gut may tell you that you are spending more than you bring in, but you can’t begin to adjust your budget, or your spending habits until you know what your spending habits are.
Look for Part II of this budgeting series under:
Frugal Facts: Learn How to Budget Your Expenses (Part II)
It’s Time to Trim Your Spending Fat