Sunday, January 13, 2013

Our Household Budget

As the end of 2012 drew near I found myself looking forward to working on the household budget for 2013. I realize how strange that must sound to many of you, but I love numbers, and get a tremendous  amount of joy out of working with them. I wasn't able to finalize the budget until getting my first paycheck of the year, which just happened a few days ago. Even though my pay did not change, the combination of increased insurance premiums, the expiration of the payroll tax holiday, and my decision to resume contributing to a 401k, now that my employer matches contributions again, made it very difficult for me to accurately estimate my take home pay.

I've tried a few different approaches, but have found that the most effective way for me to keep a budget is to manually track it in a spreadsheet, which gives me complete control over how the data is tracked. My spreadsheet is fairly simple, consisting of a list of expenses or expense categories, their budgeted amount, a running total of the actual amount spent, and the difference between what was budgeted and what we've spent. Each month gets its own worksheet, and whatever balance remains at the end is rolled over to the next month.

I have our expenses divided up into three categories. The first category is regular bills, including utilities, the tractor payment, and payment towards the loan for our land. Second are the regular expense categories, which includes household/groceries, dining out, and gas. Whenever we have unbudgeted expenses, like the vet bill this month, those get added into this category. My goal is to track these unaccounted for expenses for 2013, and consider adding new budget categories in 2014. The last category is for what I refer to as variable expenses. These include gifts, charitable giving, clothing, dvds, taxes/registration, propane, auto/home insurance, vacation/travel, and spending money.

Tracking for the regular bills is fairly straightforward. I pay the bills at the beginning of each month, and simply record the amount payed in the spreadsheet. Most of these expenses remain the same from one month to the next, so are easy to plan for. The only one that changes with any regularity is the electric bill, which can vary by as much as $100, based on the season.

Tracking for the regular expense categories is a bit more involved, but is still fairly simple. Anytime we have an expense that falls into one of those categories I simply add it to the running total for the category. The variance column of the spreadsheet allows me to quickly see how our expenses for the category compares to the budgeted amount. These are a bit more difficult to plan for, and we do go over with some regularity. Rather than adjust the budgeted amounts we're trying to reign in our spending, but if we continue to go over I'll need to make some adjustments to the budget. I should update the budget for gas, based on gas prices, and the season, but I do not do a good job of that.

The way I account for variable expenses changed in 2012, and has worked out well. Since these expenses do not occur every month, and since the amount spent toward each varies a great deal, it was difficult to plan for them in a monthly budget. Instead I've determined our annual expenses for each category, then divided by twelve to determine the amount to set aside each month. This money goes into a separate savings account, which is used only to pay variable expenses. Anytime we have one of these expenses, I record is on the variable expenses tab of my spreadsheet. The spreadsheet is set up to keep running totals, and to calculate the total amount that should be in the account at any given time. At the end of the month I do a single transfer, either from our checking account to savings, or vice versa, as needed.

I have found that handling the variable expenses this way makes things much simpler. By setting money aside each month for these expenses we can ensure that we have no big surprises. If it works out that insurance is due and we have to buy propane in December, that is no problem. However, if we weren't setting aside the month each month, it could be difficult to pay both of those bills close to Christmas, at least without dipping into our savings account.

Setting aside money each month also makes it more likely that we'll do things for ourselves. Having money set aside for buying DVDs, free spending, or for travel increases the likelihood that we'll spend that money. It can sometimes be hard to justify spending several hundred dollars on a vacation, but since the money is already set aside for that purpose it doesn't seem like such a big deal. I know this isn't a problem for some, but in the past we've been guilty of not spending money on ourselves as often as we should.

Many people do not like the idea of keeping a household budget. Some people feel restricted by a budget, and feel that one requires them to justify ever dollar they spend. I can't imagine not having one, however, which is probably due to my personality. I don't know how one can manage finances, or anything else for that matter, without tracking and planning. The budget allows us to know how much we spend each month, how much of our income goes towards any given category, and how much we can expect to save. The budget makes it easy to estimate our minimum required expenses, in case of a job loss or other unexpected situation, and that means we don't have to worry about such things. The budget also makes it easier to plan, and to determine if we can afford taking on a new expense. Without the budget, it would have been hard for me to feel confident about taking on the additional expense of the tractor payment. With the budget, however, it didn't take very much effort for me to determine that we could afford the extra payment without putting ourselves at financial risk. The budget offers peace of mind, which may actually be more important than all of the other benefits it offers us.

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