“A budget is telling your money where to go instead of wondering where it went... You must gain control over your money or the lack of it will forever control you.” Dave Ramsey
Photo by Diane Helentjaris on Unsplash
I left you last time grabbing a cup of coffee and writing up a list of expenses and totalling your income for the year.
Today we’re going to categorise them very simply and efficiently and then start tracking and thinking about allocating amounts against them. We use four bank accounts and split our budget accordingly; however, it is just as easy to break it into three categories over three bank accounts. So I will keep it as simple as possible with just the three categories:
Number 1 category (or your primary Cheque Account)
This account is going to have your day-to-day expenses; for us, it includes:
Groceries (this covers cleaning stuff, toiletries, pet food, as well as food)
Petrol
Pocket Money (kids and adults)
Family Money (I will explain more about this later)
Number 2 category (or your Bills / Utilities Account)
This account will have your regular and not-so-regular bills (these are NEEDS and not wants). It is out of this account that you set up your regular APs and Direct Debits and also where you put money aside for those not-so-common expenses:
Rent / Mortgage
Bank Loans / Credit Card Payments / Car Payments etc.
Insurances
Rates
Power
Phone
Internet
Charity Giving
Car Expenses (rego / warrant / repairs)
Number 3 category (or your Savings Account)
This account is where everything else goes that hasn’t been allocated to a specific role, and once you know the sum of this – you then split it up and allocate what you consider appropriate amounts against different categories; these categories are more in-line with WANTS or variable/unknown expenses such as medical. So for us – we allocate to categories such as:
Birthdays/Christmas
Hair & clothing
Medical
Kids / Adult activities (sports / subscriptions etc.)
Savings for a holiday / new appliance
Emergency fund
Personal debt
Home renovations / Extensions
Your lists will be different from what is above, I am basing these lists on our budget (or should I say our dream budget!), but every family has different needs and wants. So go through your list, write 1, 2 or 3 against each item you listed (according to the categories noted above).
Once you have figured this out – get three clean pieces of paper and write each list on a separate piece of paper to grasp what you have in front of you and have more scribble room. But now comes the hard part:
Go through and start allocating/guessing amounts against each one – taking into account your weekly/fortnightly income, you CANNOT exceed this… When you come to things like rates and insurances, anything you pay less regularly – take the entire year figure and then split it up either 52 times (if you get paid weekly) or 26 times (if you’re on a fortnightly pay cycle like us), and write this amount next to it. Start with category 1, and follow this with category 2 – do NOT start category three until you have completed the first two.
Once you have allocated amounts against each item in category 1 – sum it up, and put this figure at the bottom of the page. Then do the same for category 2, adding categories one and two together before you start on category 3.
This is where reality starts kicking in – look at the total amount you have allocated to categories 1 & 2, then look at your total weekly/fortnightly income, and see how much you have left. What you have left is all you can allocate to category 3 – so be careful how you split it up. Make sure you always put enough money against the more essential wants first (such as medical/clothing & hair/birthdays & Christmas); there may be some things you have to forget at this point.
BUT – don’t lose heart and give up on me, yet…there is still hope that this may not be as dire as it looks right now.
You have nothing set in concrete — these allocations are guesses (educated to your circumstances as they are). So, your homework over the next few weeks is to track your spending and place each transaction against an allocation you have made.
At the end of each pay period – take a look at what you have spent against each area within your budget, and slowly start to make adjustments to suit your requirements more realistically. You might need to adjust how much you spend in a particular area (groceries are my weakness, for example, even now, I have to work hard to keep within our budget), or you may be able to adjust how much you put aside. An example of this for us was power – I had initially allocated $150 a fortnight towards our energy bill; however, we hardly ever go over $200 a month, so I was able to cut this down to $100 a fortnight and put the extra $50 against other areas.
This is going to show you your actual spending patterns! Some of us (I am included in this) can get quite a shock when we’re faced with the reality of our spendthrift ways! However, it is worth the hard work and revelation because once you have done this exercise a few times and have an excellent handle on your budget – things flow much easier, and life is less stressful.
Keep in mind that there are things you can’t change (of course), such as your regular payments from category two like rent/mortgage etc. Your more irregular expenses, such as rates & insurance, are good examples of expenses you need to keep putting your allocated amounts aside for, do not adjust it yet, nor spend it. The relief of knowing the money is there when that hefty invoice arrives is like sweet sweet honey!
This is quite a lot to take in, and it will take a while to get a handle on it – I will go more into detail next time on how it works on a day-to-day basis in our lives and how we run it. No one is perfect, and I still overspend at times, ‘borrowing’ money from another category to cover for it… it’s not about perfection; it’s about looking after your money and your future to the best of your ability. It takes time to get a working budget that covers everything and is flexible enough to make you feel like you have room to be a little spontaneous at times. So please don’t give up; keep refining it until it works for you!
Don’t just add it to your ‘To Do’ List; go do it!
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