Monday, June 17, 2013

My Well Oiled Budgeting Machine

Fundamentals are the corner stone to any financial plan. And there is nothing more fundamental than the dreaded budget. From drafting it to living on it, I firmly believe that the budget is the cornerstone to gaining financial traction in your life.

Now I’ve written briefly on the budget before. But what I want to focus on today is how our household drafts our budget and how we stick to it. I have come across several posts and articles in recent weeks in which readers and writers examine their theories on the best ways to follow a budget. So here is a draft of our budget and the ways in which we follow it. No theories, just facts.

**Please note that most specific line item totals such as pay and charitable donation amounts have been amended to protect the innocent. However the budget line item titles such as utilities, church donation and the like all actually do appear on our monthly budget. So enjoy!**

First things first

My wife and I have been drafting budgets and living off of them for four years now so the process has become second nature. But when we first started this process, and even now when we make changes and re-prioritize, we set out to be in full agreement on our plan together well before the scheduled pay date hits. In general I, the nerd, prepare the budget and my wife gives her thumbs up/down and we negotiate/compromise/find 3rd alternatives until we are in agreement on our plan. Whether we are saving for taxes, travelling, how much we give or bump up the emergency fund, we are in full agreement before a single dollar from our earned income hits our account.

Pay Date #1

In our household my wife and I are both employed Full-Time (yay d.i.n.ks!) and during the course of one calendar month we receive 3 paychecks. Our goal, each and every month is to plan every one of those incoming dollars before they hit our account and agree on where those dollars are going. Ultimately income minus outgo equals zero for each and every pay period…forever! Every dollar is spent on purpose. So here is what we have on board for our July game plan before July 1st hits.

  July Payday 1
Charitable Donation
Sinking Fund for Insurances
Emergency Fund

Now since we are married we consider ourselves a team. There is no “your paycheck” or “my paycheck” everything falls into the line of “our paychecks.” So within the 1st paycheck we receive in July we will make an online charitable donation, set aside money for clothing and laundry, pay rent, set aside sinking funds to pay our annually due term and rental insurance premiums and focus disposable income to building our emergency fund.

So within this mix we do our share of being sophisticated with online transfers/payments and making cash withdrawals. Our rent, money saved for insurance premiums and charitable donation are all done automatically online. And for the record I love using sinking funds. For 12 months out of the year we set aside 1/12 of the amount due for our term life policies and renter’s insurance in a simple savings account, and when the bill comes due we withdraw the money to our checking account and pay the bill. No ifs ands or buts, like clockwork!

 We also use cash filled envelopes to have on hand for clothing purchases and laundry. Yes, we actually have envelopes that read “LAUNDRY” and “CLOTHING.” There is a card operated laundry facility in our building and when our laundry card gets low we head to the envelope for a refill. And when we feel like buying clothes we head to the envelope, it’s really painfully simple. So let’s move on.

Pay Date #2

July Payday 2

Entertainment and date night
Charitable Donations
Gym Memberships
Travel Account
Spouse #1 blow money
Emergency Fund

Our 2nd pay date in the month is the largest of the three; hence the need for more line items, but the formula stays the same. For groceries, entertainment and date nights we make cash withdrawals and place the funds into labeled envelopes accordingly. When we grocery shop we hit the envelope first and keep a running log of what we have spent grocery wise against what remains. Charitable donations, utilities and gym memberships are automatically spent from the checking account without giving a second thought. For July we are in the winding months of saving for the remainder of our 2013 travel plans, so that gets transferred to our travel account which is held in a simple savings accounts.

Spouse #1 prefers to carry their monthly blow money on their debit card so the spouse is trusted to stay within their budgeted amount. And I am a fan of having blow money budgeted monthly. Dave Ramsey says that it’s in memory of our former plan (see not paying attention) and it gives us a bit of extra cushion in case we want to spend some extra money on dining out, buying flowers or some extra groceries. And as we were in agreement on pay date #1, all disposable income is being routed to beefing up our emergency fund. This leads us to:

Pay Date #3

July Payday 3
Charitable Donation
Spouse #2 blow money
Tax Account
Give Account
Emergency Fund

With consistency we make sure again to automate what we can and be on the same page with our planning. Our last charitable donation for the month as well as saving into our tax and give accounts are automated. Our tax and give account monthly savings function as sinking funds as well. With quarterly estimated payments due for taxes, the money is there to withdraw and make payments.

The give account is a bit trickier. At the start of 2013 we set an agreed upon limit on what we would spend on gifts for family and friends’ birthdays, anniversaries, weddings and what not. From there we save 1/12 of that ceiling amount throughout the year. Now we do remain flexible on our giving. Should one of us feel lead to give more to say someone going on a missions trip, an impromptu ask is taken at our church, or we want to help someone in need, we are absolutely open and flexible with one another to make the extra give as long as we are in agreement and it is planned ahead of time before the scheduled pay period hits. For what it’s worth in addition we use disposable income in August to save, in one fell swoop, our spending limit for Christmas gifts. And of course lastly we send our disposable income to our emergency fund.

What about the rest?

For several of our monthly expenses we utilize our employers’ programs to pay pre-tax. We pay for our health & dental insurances, commuter transit passes, make 401(k) contributions, and save in our Health Savings Account using these pre-tax programs.

The Exciting Conclusion

When it all boils down we plan to do our best to have funds readily available to cover every imaginable expense we face throughout the year.  Our emergency fund takes care of the unexpected and monthly savings accounts to cover taxes, gifts and insurance premiums. And we utilize cash envelopes to hold ourselves accountable to avoid overspending. We also make sure to steadily save for retirement and annual travel plans without blinking an eye and to be intentional with our disposable income. Currently we are using our disposable income to beef up our emergency fund and once that is done we will go back to building our war chest for a future home purchase to be paid for in cash.

Purpose and intentionality are the major players when it comes to budgeting. And I know that you can excel at it too! I mean, if this Communications major who couldn’t spell finance when he was in college can do it… 

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