the ultimate guide to budgeting
I'm Not Flipping Burgers when I'm 70
Every time a transaction is made it needs to be recorded into a ledger-type system. For example, when using a checkbook, recording information is often performed at the checkout line. If credit cards or debit cards are used the information will be recorded at home. With the advancement of technology the checkbook is being used less due to the ability to utilize online banking and mobile apps. This allows people manage their transactions via software tools or through a budget spreadsheet without necessarily write down items in a traditional ledger.
The main challenge after creating the right budget is not so much tracking the known payments especially those that are auto-debited, rather they are the items that are classified in the spending category. Being this category is for free-form spending (money to spend without a designated category) they have to be treated as a budget within a budget. Items can be tracked in the standard budget or via a separate ledger as the amount of transactions can be in the dozens in a given month. If transactions are overlooked and not recorded, this is where problems begin. A budget has only so much room for error and if overspending occurs the spending money category will be reduced or other items such as savings vehicles would be impacted.
2.1 Inflows and Outflows
Tracking a budget is performing simple accounting principles - If money is withdrawn from the bank account it has to be withdrawn from a ledger and it needs to coincide with the budget plan. It is easy to perform 200 transactions each month depending on the size of the budget consequently, recording information should be done at minimum, every few days.
Managing Monthly Payments
The more transactions that occur each month the likelihood increases for a potential error to occur. Jasper needs to watch out for the following items:
First and foremost, paying bills on time prevents late fees especially with credit cards. The easiest way to complete these is for Jasper to set up automatic payments to creditors. This can be performed through a business’s web site such as the electric company or through the Jasper’s bank online. However, not all transactions are executed through that medium; the local doctor is a common example of a business that will send a bill for payment to be mailed or called in for payment with a debit or credit card.
It easy to click an online payment button or write a check and not look at the amount that being authorized. In the cases where the bills are fixed, this is shouldn’t occur as someone is automatically performing the transaction. However, items that can vary each month such as the grocery bill, mistakes are more prevalent. Although the budget for such items tracks the average amounts, before Jasper pays anyone he should validate the budget list to align it with the information on the bills and then investigate any discrepancies.
Items Over and Under the Projected Amount
A positive thing to watch out for are for items that didn't cost as much as the budget projected. These items can vary depending in the budget plan namely gasoline, utility bills and groceries. If items are under budget, it leaves more money under the cap to spend. On the flipside, items can come in over the projected amount which is a main reason for the supplemental account to house money that is under the projected amount and to pay into the budget when items are over the projected amount. The expenses that should be binned to supplemental for service items such as utilities, cell phone and cable rather than items where the spending is optional and where spending can be directly decided on by Jasper. Examples of this include dining out and groceries; he doesn’t have to eat out or he can curb spending on groceries as he wishes.
2.2 Adding the Tracking Columns
At this point Jasper’s budget spreadsheet is shaping up as every transaction will be recorded properly; however, the last item that needs attention is managing the spending money which is at $703. The most comprehensive method to manage the spending money is to create a separate spreadsheet to track the $703. The simple rule is that if an expense is not on the master budget list, then it is considered a spending item. Every time a transaction is made, it is recorded against the $703 to keep a running total of what's left until it reaches a zero balance. Executing this is a matter of recording all of the items under $703 cell and from there the software program perform the subtractions.
The drawback to this plan is tracking the transactions can be cumbersome as it is a budget within a budget. Some people like to track transactions for the entire budget to know where money is being allocated to. For example, tracking dining out habits may reveal information that may lead to a change in that spending. Often when looking a year’s worth of spending it will prompt change in the budgeting choices which is the benefit of the tracking exercise. If Jasper chooses not to track the spending habits then a separate ledger is not necessary. Therefore, sticking to the same criteria, if an item is not on the master list then it is a leftover item and you can simply subtract money as it comes out. Then using the Remain column will reveal cash availability. So from the withdrawals from table below the flowers are at $52, baseball game $75 and car qash $8, equaling a total of $135 which will simply be added to the actual column.
2.3 Tracking Bills with the Credit Card
One of the most dangerous things when managing a budget is when paying expenses with a credit card. Mistreat it and you'll feel its negative effects for months to years. Using a credit card it can as be beneficial for many reasons. One is that credit card companies are generally flexible about removing mistakes or items on the card that were not intended to be there. This may arise when a company charged for something that wasn’t authorized or the card was lost and someone ran up charges. Another reason is that companies offer rewards to customers in the form of discounts for services in addition to cash back cards on based on percentage of purchases or cards that offer airline miles for travel.
When it comes to paying bills with a credit card, it requires extreme discipline for when it is used; money is added to that balance whereas with a debit card, the money is withdrawn immediately. When paying for expenses by way of credit card it requires an additional line to be added to the budget. When a transaction is recorded on the credit card the affected line items in the budget are treated as normal in terms of the amounts applied to it meaning if $100 was applied on the credit card for the spending money category, it needs to be reduced by $100.
At the same time the “Credit Card” line item increases and becomes a payable bill. This balances out the inflow and outflow. Therefore, when the numbers are modified, they’re considered as a “wash” (when a transaction is balanced out with a credit and debit therefore, does not affect the Gain/Loss in the budget). In the table below, the leftovers had $100 applied to it as well as the car payment and child care at $300 respectively. From there the actual column is modified and the $700 is pushed to the Credit Card column.
The Project column for the credit card is really a running total due to the fact determining a fixed amount for that bill each month is difficult to predict. The actual column is what has been paid at the given moment because more than one payment may be applied during a month.
2.4 Managing Bill Due Dates
Like many things constructing a plan on a paper is not always what occurs when practicing it. With budgeting it is not always as cut and dry when explained in book-form. Jasper’s budget scenario is based on receiving checks on a biweekly basis however, when paying bills situations may arise when there is more money due than income that has been received. To manage this, Jasper needs to perform a deep dive to assess when bills are actually due to manage cash flow.
On the whole bills are due at various times during the month. In Jasper’s case this the budget states a total of $1,974 in bills are due (not including Spending money) on 8/1 and the take home pay is $2,239 for the biweekly schedule. His next paycheck may not come before all of his bills are due which presents a problem.
(For terms of this exercise, the Jasper’s budget is taken from the premise that is created from scratch however, it is important to note when starting a budget some upfront cash flow may be required which my take away money slated for savings vehicles in order to have enough cash flow to pay expenses)
The best way to mitigate this is to know when the bills are actually due. For example, it is standard in the industry that mortgage payments are due on the first of the month yet it is not considered late until the 16th of each month. That would free up $861 or 31.4% ($861/$2,735) of his income to pay off other bills. The key is to read the billing statements to be accurate as shown in the figure below that reveals when the payment is considered late.
In the above figure the due date should be February 2nd however, the actual time that it is considered late is February 12th. It is common for many bills to be due at the beginning and ending of a month but it is not a standard. By performing this analysis it will leave breathing room for Jasper to maintain cash flow and reduce pressure of paying his bills all at once. Additionally, his Supplemental and Savings vehicles total $1,040 which can be paid at any time, as they technically have no due date.
2.5 Carry over Bills and Automatic Bill Pay
Just about every bill has at least a week's grace period before it is considered late. This is where utilizing online bill pay from the bank is an extremely useful tool. Rather than waiting for checks to clear in the mail, bills can be paid when desired. In the figure above, the due date is February 2nd however, the budget calls for money through the end of the prior month (January) meaning cash will more than likely be depleted. Therefore, setting up a bill pay through the bank for as late as February 12th maintains cash flow. If cash flow is a problem another method to aid the effort is to pay the Supplemental items in arrears. This is acceptable as they don’t have a due date. Seeing that cash is needed to pay the bills that have a due date in the current month, in the following month enough money will be available to pay those items off. In the bimonthly $2,239 paycheck scenario, when the first check arrives, all of the Savings items can be paid from the prior month. In this scenario, the supplemental line items from the prior month have to be carried over to the new month. The caveat is that these carry over bills cannot go into more than one month otherwise this means the bills are not getting paid and savings are not accumulating.
2.6 The Master Budget List
The most simplest and efficient method for maintaining the budget is to track income, transfer money between accounts and pay bills, through the Internet. All the information is at the fingertips. When auto payment is created for bill paying then there is no need for a “Sent” column in the budget, rather just a “Due” and “Paid” columns. (Checks appear online as well) Once all of the bills are in place then it is time keep the budget simple and add the income and the expenses for tracking. The table below represents Jasper’s complete budget made from scratch.
The budget sheet table below includes the spending line item which has incurred transactions which are tracked in a separate spreadsheet. The actual reductions come from the Spending line item as a whole. Some prefer to only subtract money from Spending when a transaction does not apply to any item in the spreadsheet and do not create line items to representing the information. When tracking spending items, the projected and actual columns are filled in simultaneously as these items are not based on projected amounts. Doing this it creates a “wash” (balances out the transaction where and does not affect the Gain/Loss in the budget).
2.7 Inflow and Outflow Scenarios in the Budget
It is important to note that unexpected items will appear often throughout a year as shown in Area 4 for the contact lenses. Simply adding a line to the spreadsheet will create tracking to follow payment for it or it can be absorbed by the spending money, Miscellaneous or other bills come in under the projected amount. The following scenario for Areas 1-4 represents common undertakings that will occur during Jasper’s monthly budgeting cycle.
In this scenario there was an additional $50 due to the check rebate and so the additional funds available absorbed the contacts at $20. The cells highlighted in green in areas 2, 3 & 4 reflect that these bills have been closed out for the month. At this juncture bowling, gas and electric utilities came in under budget at combined total of $30. When all bills are paid for the entire month, the expenses that came under budget are free to use in any area or to spend freely.
2.8 Closing down a Month
In this scenario Jasper’s budget was actualized at a loss; the miscellaneous category can be tapped into to offset this and balance the budget. In addition, any funds in the miscellaneous category contained in the supplemental account from a prior month are be available to pay for items as well. This is why the category exists. From here Jasper needs to analyze the areas that require attention to balance it.
As the budget has neared the end of the month child care is over budget, bowling and home phone are under budget, spending has a surplus, the cell phone is not paid yet and the miscellaneous category has not been paid to the supplemental account. At this point Jasper finds out that child care is coming in over budget by $125.
Accounting for the child care payment results in $630 - $425 = $205 in the bank account showing a loss of $125. So how is this mitigated?
The solution to balancing the budget is to draw from items that were under budget and from the miscellaneous category.
First: disregard the cell phone category as that bill has not been paid and money for that is baked into the budget.
Second: Leftovers, bowling, and home phone equate to $50 to pay toward child care so by changing the Actual column to match the Project column it leaves them with "Remain" at $0.
Third: draw $75 from Miscellaneous to reach the $125 goal for child care.
Fourth: the remaining $90 from Miscellaneous will be transferred to the Supplemental account leaving $115 for the cell phone which is transferred to Jasper’s next month’s budget.
*Note - In figure above the cell phone has not been paid. Hence, it is reflected in the next month’s budget which will increase the cell phone to $230 and the In account will start with $115.
2.9 Money Transfer Between Accounts
Each month will have bills with fluctuating amounts going to and from the supplemental account and it is important that is tracked properly. This will come from the known supplemental items and some items may come over or under budget. By tracking the money exchange, it provides flexibility to have a bird’s eye view of how to manage it. The table below shows the planned items to be transferred to the Supplemental account each month.
In the Actual column child care is under by $33.92 and the gas utility is over by $31. The underage in child care will present and overage in the budget and so this money will simply be transferred over to the supplemental account through online banking. The gas uitility will present an overage and money will come from the supplemental account to even out the budget.
This will be reflected as a new line item in the income and expenses portion of the budget. As utility bills are usually sent prior to the beginning of a new month this amount can be baked in at the beginning of the month.
Supplemental bills not paid to a creditor or service can handled at the end of the month as they have no technical due date which allows for the mandatory bills to be addresses first; however, they can be paid by the budgeter’s discretion.
As the supplemental account has its own bank account it also needs its own spreadsheet. It may be used to track each month within a yearly cycle which allows for a history to see spending patterns to help aid in future decision making and it also may be used a running total. (There are no rules for governing it as long as money is transferred to and fro per the budget plan)
In the table below child care and gas utilities received upfront cash in the beginning of the budget plan to pay for future fluctuation payment cycles to mitigate negative balances in the accounts.
In the example, child care is given $70.88 to start the year in addition to an underage in the January billing cycle of $33.92 which rendered January at a $104.92 balance. The gas utility was given $104 stipend to begin the year and it also needed to pull $31 out in the same month due to an overage in the bill. This leaves $77 in the account. In February child care pulled out $43.16 and the gas utility pulled out $73 leaving them with $61.76 and $4 respectively.