Beating Broke

Personal Finance from the Broke Perspective

Creating a Simple Budget the Beating Broke Way

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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.

Create Your Own Layaway Plan

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The stores are already starting to advertise for the holidays, and several major retails are pushing the option of layaway as an option to finance your gift giving.  While layaway was not offered in stores for years, it is making a comeback due to the current economy.  You can choose to use layaway or not this year, though it is certainly a better option than financing gifts on credit cards, but why not also start your own layaway program?

One idea that revolutionized the way I budget is to set aside money each month for recurring expenses.  I used to be a teacher, and I could choose to teach classes in the summer or not.  Sometimes I did teach the classes, but a few summers I chose to take off, which also meant that I was choosing not to get a paycheck for three months of the year.  Considering I was the sole breadwinner at that time, summers could pack a painful punch.

Kmart - Sedalia, MO - August 2009However, I began to enjoy my summers off and not suffer financially when I began setting aside money for monthly expenses.  At the time, we required on average $2,500 a month to live, so that was $7,500 I needed during the summer months to survive without a paycheck.  I received a paycheck nine months of the year, so I automatically deducted $833 a month into a special account to live off of during the summer.

Even if you have a regular paycheck coming in all year long, you can benefit from this plan.  For instance,  I know that over the course of a year I would like to spend $500 on gifts.  Some months I may not spend anything, and other months I may spend $100 or more.  To make sure I have the money set aside, I would take $500 and divide it by 12.  Then I would put aside $42 a month for gifts.  It would be its own little gift fund, and I would draw from it when I needed to purchase gifts.

Likewise, my energy bill is very low in the winter because my landlord pays for the heat, but the electric bill is high in the summer because I have to pay to air condition or drafty apartment.  I set aside $50 a month for electricity.  During the winter months, my electric bill may only be $25.  The remainder of the $50 after I pay the monthly bill goes in savings in a special fund to help cover the high summer electric bills.

If you set your monthly budget up based not just on your exact expenses for that particular month but for the average you will spend all year long divided by 12, you essentially create your own layaway plan.  On months that may have higher expenses, you simply dip into the money you have already put aside.  This type of budget makes your monthly outflow much more stable and protects you from the highs and lows of creating a budget based on each month’s actual monthly expenses.

photo credit: robertstinnett

A Simple Technique to Help Parents Meet Their Savings Goals

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Having kids is not cheap.  There are many expenses that are associated with small children that are hard to get around no matter how frugal you are.  For instance, if you are a dual income family, you must pay for daycare and disposable diapers as most daycare centers will not accept cloth diapers.  In our area, daycare for an infant can run a family $1000 a month.  You may rejoice when your child enters preschool because you will find an extra $1000 a month in your pocket.  Instead of just absorbing that money back into your budget, why not earmark it for something else?

Imagine if you took that $1000 a month and invested it?  That is $12,000 a year!  You could continue to pay it to yourself, perhaps setting up a college fund for your child with the money you used to pay in daycare.  In five years, you would have $60,000.  After that, just let it sit and earn interest for the next eight years, and your child’s college education would be largely paid for.

JJ Following The Girls To School free creative commonsWhat if one of the parents decides to stay home to care for the children, in part to avoid expensive daycare?  They may not have the $1000 a month to put away.  While this is true, there are still plenty of other expenses associated with young children that you eventually won’t have to pay.  For instance, we are paying roughly $75 a month to diaper our two girls, and I anticipate within the next 6 to 8 months, both girls will be out of diapers.  It would be very easy to just absorb that $75 back into the budget, but that isn’t what I plan to do.  Instead, I plan to set up a college education fund for my kids and invest that $75 a month.  Yes, $75 a month will not add up very quickly, and it certainly won’t put even one of my children through college.  But it is a start, and it is more than we are putting away right now.

Likewise, if you have a monthly car payment, when the car is paid off, use that money to pay yourself a car payment so you can pay for your next car in cash.  If you bought a car 7 years ago, and had a monthly payment of $475, and you paid off the loan in four years and continued to make that monthly payment, you would now have $17,100 set aside for a new car, which would be enough to buy a nice, one to two year old car for cash.

You may argue that the car payment or the daycare payment was a hardship and that now that you no longer need to pay those payments, you need the money to pay for other things.  This might be true, but if your child was still younger than preschool age, you would find a way to make the payments because you would have to.  Or, if you now have other expenses for your child such as after school care for $300 a month, deduct that from the $1000 you used to pay for daycare and save the remainder.  If you can maintain that mindset, you will find yourself reaching your financial goals quicker than you imagined, simply by not seeing that money as “free money” to now spend as you will but rather as money to continue to invest in your and your child’s future.

photo credit: Pink Sherbet Photography