I’ve talked about “the budget” in previous posts, but up until now I have not shared anything online. I’m a little surprised too, because I really believe it is a key tool for achieving our goals and dreams. From the very beginning of our life together we have created a budget and tried our best to live within it. It’s not perfect. It will need adjustments over time. But having something IS better than nothing.
Everyone needs a budget!
I don’t care where you sit on the income scale, you need a budget. If you have limited financial resources, a budget is an important tool to make sure you don’t spend those hard-earned dollars on the wrong things. And if you’re a millionaire, having a budget will help you to stay a millionaire.
One of our goals is to save and invest as much as we can while we’re young. A budget helps us to prioritize that goal and also balance it with our day-to-day living expenses. I use the word “balance” because we have a lot of choices available to us.
We could choose to save ALL of our income, but that wouldn’t leave any money for housing expenses, electricity, water, etc. Or we could choose to spend ALL of our income on dining out, new clothes, sporting events, and vacations. But that wouldn’t leave any money for savings. It takes “balance” between all of these things. A budget gives us that power and gives us that control. It’s choosing how to spend that money ahead of time.
Our Very First Budget
Before I show you our current budget, let me share our very first budget that we used starting in June 2005. I’ll warn you that it’s pretty rough looking and not very good on the eyes. But hey, it was a good attempt! I had started it from scratch in Microsoft Excel and tried to organize it in a way that made sense. I also did my best to think through all the categories of spending we might encounter. There are housing expenses, auto expenses, living expenses, other expenses, and investments – with breakdowns for each one.
(click on the image to bring up a larger version)
The numbers in this budget are the actual numbers we used when trying to estimate our June 2005 spending. It’s interesting to look back at it because we didn’t yet have our duplex purchased — so housing expenses were very low! On another note, when I initially created this budget, I used “take-home paycheck” (also known as “net pay”) for our revenue source. This is why you don’t see any Federal or State Taxes, Social Security, or Medicare expenses. In later versions of the budget, I use “gross pay” and choose to show those expenses.
Our NEW Version of the Budget
The original budget we used in 2005 was a good “first draft” and served us well for a few months last year. But I’m much happier with our newer version of the budget now. It looks better and has additional expense categories that make sense.
I can’t take all of the credit for the design. It’s actually one of the built-in templates available in Microsoft Excel. Anyone can create it by selecting it from the available free templates. I did make alterations to it though, adding several categories and items, while removing others. So without further delay, here it is!
(click on the image to bring up a larger version)
Much better, right? This newer form gives us more flexibility (and visibility) when it comes to our spending. I also really like that I can do our “projected costs” (aka “estimates”) at the beginning of the month. Then at the end, I can fill in the “actual costs” to see how they differ. The Microsoft Excel spreadsheet does all of the calculations automatically.
We started using the new version of this budget form around October. You may already recognize the spending categories if you read our 2005 Expense Review Part 2 post. Over time we will certainly add new categories and remove existing ones. The form is flexible enough to accommodate these changes and more. It can easily grow with us.
Blog Friendly Version of the Budget
The actual budget form that we use each month exists in Microsoft Excel. In sharing it for this post above, it is flattened down as an image file though. I understand it can be difficult to view the small text and numbers when its an image. You could be reading this post on a computer where it may not be quite so big of a problem. But if you’re reading from a phone, then you likely couldn’t see the image very clearly without zooming in. So when it comes to the blog, I plan to transpose all that data into a more “web friendly” version.
Here are the exact same budget numbers in a format that should be easier to read on the blog:
Projected Monthly Income
|Total Monthly Income||+$7,713|
|Maintenance or Repairs||$150|
|Water & Sewer||$60|
|Books, Magazines, Newspapers||$0|
|Computer & Video Games||$0|
|Movie & Video Rentals||$0|
|Toys & Games||$0|
|Fiance’s Roth IRA||$250|
|My Roth IRA||$335|
|Vanguard House Fund||$1,000|
I should mention the names of these categories are slightly different than the names used within our Microsoft Money software. I don’t have the best reason why, other than I think it looks cleaner on the printed budget form to use these shortened names. But even though the names are different, they match up nearly one-to-one. Ultimately everything we spend gets typed into Microsoft Money and tracked in that program.
In drafting our budget, we tried to be as thorough as possible in anticipating our expenses and making sure to balance the charges evenly throughout the year. For instance, we tried to estimate how much auto maintenance and home maintenance to expect. Not an easy task. Sure the number of oil changes should be reasonably predictable, but who knows what, when, and how much it’ll cost if something a little more substantial occurs? The point is to at least make an estimate and make sure to list it as an expense category.
Mandatory or Guideline?
I will be the first to say we respect the budget. My fiance and I have both contributed to its creation because we want to succeed financially in our new life together. So it’s only natural that we want it to work! But that said, we don’t want our lives to be too rigid because of it.
Therefore instead of considering everything as “mandatory”, we think of it more as a “guideline”. Just look at the nice looking Excel budget form image further above, you’ll see the title of it listed as “FI Champion’s Budget: Guideline 2006″. That’s not an accident. We put it there on purpose.
This means every dollar amount listed next to an expense category doesn’t always have to be considered the “limit” for a given month. I am okay if we overspend on some expense categories in some months, so long as we under spend in other expense categories. If our electric bill ends up being lower than our budgeted amount, it would be okay for us to spend a little extra dining out. I see it as balance. We just don’t want to ever spend more than we make!
Cumulative Expense Categories
At the risk of making things sound too complicated, let me introduce one more element of our budgeting: Cumulative Expense Categories. These are expenses that don’t always have to be paid each and every month. But at some point during the year, they do get paid. Some examples of this are:
- Property Taxes
- Home Insurance
- Home Maintenance or Repairs
- Auto Insurance
- Auto Maintenance
Every one one of these items will be an expense during the year. They just hit at different times and they won’t be even amounts spent each month. We pay property taxes just once, in December for instance. Same with our Home Insurance; it is one bill each year. Auto insurance gets paid every 6 months. I think you get the point.
So for each of these cumulative expense categories, if we don’t spend money on them in a given month, I actually take the unspent money and save it for later. Specifically, I move it into our Vanguard Money Market account until it gets needed.
They are “cumulative” because the amount saved may grow and grow and grow each month, for several months. But when the expense finally comes due, I will pull out the money from our savings in order to pay for it.
One more note with these types of expenses: when I talk about our budget being a guideline up above and talk about “balance” between overspending and under spending on different expenses — these ones are really excluded from that discussion.
I know our property tax bill should be roughly $2,832 for the year and will be paid in December. Divide that by 12 months and you get $236 per month. Therefore I am budgeting and saving $236 each and every month in anticipation of that big expense. Just because I didn’t “spend” it in February doesn’t mean I can now go out and buy more clothes as a form of balance. No. I have to keep that money set aside in this case.
In my mind, the most important outcome from budgeting is to make sure we prioritize our savings/investments. In crafting the budget, we tried to see just how high we could push that amount. We want to maximize savings/investments as much a possible. I just wanted to get that point out there.
We know how valuable that savings can be when it gets invested because we are starting at a younger age. I’d argue that it’s more important to save now than it would be 10 years from now when we’re age 30+. That’s a key reason why we prioritize it. But I know it can only go so high, because we still have to pay for base living expenses and other things.
And we are prioritizing savings/investments this year. In the budget, we are planning to save $3,241 per month.
We make a total of $7,713 per month from our paychecks and duplex rent income. Doing the math, this puts our savings rate at 42% of gross income. Woo hoo. That really does give me reason to cheer! If we can continue to keep it this high, 2006 should be a great year.