Creating a Budget That Works
I’ve been living by a budget for about 5 years now. Over time my budget and, more importantly, how I implement that budget in my everyday life has evolved. After my spending holiday last year, I thought a lot about changes I could make that would encourage and reward me for sticking to my budget. And I’ve come up with a process that so far is working great and motivates me not just to stick to my budget but to actually spend LESS than I allot myself in many areas.
But first, if you don’t have a budget and have never created one, here is a simple overview on how to create a budget.
Now, before I get into my new budget process, let me share some of the challenges we have from a budgeting perspective that I think many of you face as well.
1. Variable Fixed Expenses – Our biggest challenge is how much our fixed expenses vary. The biggest culprit is utilities (propane in the winter and electricity in the summer), but even items like school supplies and clothing can really throw our budget out of whack.
2. Unplanned Expenses – Our life has changed a lot over the past year, a new child and a child entering school, but our budget hasn’t evolved with our life and as a result we had a lot of expenses that we simply hadn’t budgeted for (school supplies, clothing, swimming lessons, etc).
Budgeting with Reserves:
Last year we started a reserve fund for home and car repairs. A reserve fund is simply an account set up to meet any unexpected costs that may arise as well as costs of future upkeep. Every month we deposited money into that account to cover maintenance costs for our new house and also for maintenance to our cars, and as expenses hit we simply withdrew the funds from the reserve account.
This worked extremely well for us as we never overspent in these areas and we actually ended the year with a surplus of funds in the reserve account. I found that watching the account grow gave me motivation to SPEND LESS in these areas. Since this worked so well in these two areas I decided to implement it across my whole budget and create a reserve fund for every expense category we have.
Creating the New Budget:
Here’s the process I went through to create our new budget.
1. I examined our expenses and created a budget category for every group of expenses (groceries, tuition, clothing, home maintenance, car maintenance, etc.)
2. I then determined an appropriate expenditure for the year and averaged it out over 12 months
3. I created a savings account and labeled it Reserves.
4. Every month I deposit the budgeted amounts into the Reserve account. (Note: I only have one actual savings account for reserves. The reserve account is a pool of funds and each spending category balance is tracked on a spreadsheet)
5. As I spend I pull money from the reserve account. (Note: I personally use our cash back rewards credit card for all my purchases. I track the expenses and pay them off weekly out of the reserve fund. This requires discipline and is not for everyone.)
We are one month into this new budgeting process and I can report that so far we have not overspent in any category, in particular on Groceries which is my most common area to overspend. Knowing that any budget surplus I have is already tucked away in savings is a huge motivator for me. And we now have a budget that is aligned to our expenses so I’ve minimized the unexpected hits for unplanned expenses. Of course you can’t plan for everything so we also have a separate emergency fund too.
This method works for us. But the key to creating a budget that works is to know what your spending, align your budget with your expenses and your financial goals and then find a motivator to keep you on track.