One of the most important parts of paying off your debt and becoming financially independent is creating a budget. At the very least it gives you an outline of where your money goes and where it should go. At it’s most extreme, it serves to create strict limits for your spending. How lax or strictly you adhere to the budget is up to you and how die-hard you are about your budgeting.
One thing remains constant however. When the end of the month comes, the ending balance should be 0. Money in – money out = 0. If you have a deficit, you overspent and need to compensate for that by either reducing budgeted amounts in another category or by reducing the available money for the next month. If you have a surplus, (good for you!) then you need to budget that money until your end result is 0. Most of us looking to become debt free will budget any surplus towards excess debt payment.
Here’s how we have things set up at the Beating Broke household.
Income. We keep a very simple income spreadsheet. It lists the sources in Column A. The amount in Column B and any notes for the income in Column C. All of that gets totaled at the bottom. That’s all we do with our income. It’s the expenses that we really need to focus on anyways.
Expenses. The expenses spreadsheet is a little more complex. I have a field for the income that I carry over from the income sheet. I also have a field for a total of all budgeted amounts. I then have a few calculated fields. The first is a field that gives me the budgetary deficit or surplus. I get that by subtracting the total budgeted amount from the income. A second calculated field gives me the true deficit or surplus. This is calculated by subtracting the actual amounts spent from the income. This field is really only useful for balancing at the end of the month, but if you’ve done your budgeting properly, the amount should be small and easy to take care of.
The meat of the expenses spreadsheet is everything else. Column A holds the categories. I’ve broken them down into header categories and sub categories. For instance, the Health header category has sub categories for Health Insurance, Aflac, Prescriptions, and Medical Bills. I could go even further and list each bill, but that would greatly increase the amount of time I spend on my budget. I want it to do it’s job (keep my money in order), not take up hours of my time. Column B holds the budgeted amount for that sub category. Pretty simple really. Column C is the amount that I’ve spent to date on that category. Column D is the % the budgeted amount is of the income/budget and Column E is the % that the actual spent amount is of the income/budget. I’ve also thrown in some totals for each header category as well as the % of total for those as well.
Each week, we go over our checkbooks, credit cards, and all other financial happenings and enter them in the appropriate places. By doing it every week, it keeps the task down to a half-hour or less which helps with reducing the stress level of working with your finances. Especially if they are a little wonky to begin with.
Budget deficit and surplus. Occasionally, we get to the end of the month and we have a surplus or deficit. We’ve either spent less than we budgeted for or we have spent more than we budgeted for. The latter is a little rough, but the first is always fun. Because we don’t usually figure out the overall surplus/deficit until the month has ended, we can’t budget for the surplus/deficit in that month. So, I’ve thrown in a field on the Income sheet that is titled “Carryover” and one in the expenses sheet that is titled “Shortfall”. If we have a deficit, the carryover value is 0 and the shortfall amount is the amount of the deficit. And vice versa. This helps with taking the surplus and budgeting it as an extra debt payment or in accounting for previous months deficits.
Most of these ideas are pretty basic budgeting principles. We’ve tweaked them around a little to fit our financial style and to be loosely based on the Dave Ramsey system. If you’ve got questions on budgeting that we might be able to answer, drop us a line and we’ll try and answer them as soon as we can.
Personally I’ve never been able stick to any budget or keep accurate accounting for any length of time. I admire people that can though.
Luckily for me, I’m a naturally frugal person and excluding the past two months never overspend.
I like your thinking. I do the same thing. I currently have a savings account and student loan budget that take my excess earnings down to zero. At this rate, the student loan will be paid off in full by the end of the summer.
@thewealthyicelander I find that it helps, even if you aren’t strict with it, to have a record of past spending and being able to spot trends when you do overspend. For the minimal amount of time that goes into it, it’s worth it for me.
@eric, It sometimes seems like we don’t get anywhere, but having our budgets to look back at usually reassures us that we truly are. Especially when the extra money for paying stuff off dwindles, and the statement balance doesn’t reflect as big of a change as we’d like.
Thanks, great article. I believe I am quite unusual in my approach to budgeting. I keep a note on my phone and write down every time and spend and the amount. About once a week I update a spreadsheet which contains all my income and outgoings. I have a buffer in my account for when I go over my income that month. This system makes me more conscious of my spending as I write it down twice (phone and spreadsheet) and also since I categorise my spending I can see in which areas I may have overspent that month. You can read more about it on my blog under ‘budgeting’.
We’re experts at making budgets but not adhering to them! Thankfully it seems like we are on the right track this time and are trying to faithfully track our progress this time.
Yep, budgets definitely benefit from the KISS method. There’s no need to go crazy keeping track of income and expenses. Mine is even simpler than yours, I don’t track percentages and I don’t break down categories. It’s worked well though for the past 6 or so years.
I’ve found that if I have money at the end of the month, it typically gets eaten up the following month so we end up pretty steady over the course of a few months.
Great post!
I’m a bit of a budgeting nerd myself (I coach people through the Dave Ramsey program for a living). It sounds like my excel spreadsheet is similar to yours (not exactly though).
It’s pretty simple to do considering most of the monthly bills remain the same (with the same due dates), the only real fluctuation is in what you spend. However, by limiting yourself through using the cash envelopes (Dave Ramsey style) it eliminates that problem.
I’d agree, the biggest key is what I call “closing out the month.” Having that “0”-based budget is extremely important. It’s the part where you get to tangible see the “extra” progress you make each month.
Most of our budgeting process is based on the system that Dave Ramsey outlines in his books, so it’s no surprise that ours is similar to yours.
Loving this post. Budgets can be used for everything are so useful when done properly. Stay young and thirty 🙂
This is very helpful! Thanks!