>Household Finance, part I: The Budget

>Let’s face it: one of the most important things we can do to ensure that we’re running a successful household is making a budget. Whether we own our home or are renting a home, flat, or apartment, keeping track of the bills and making sure that we are setting aside enough money to pay them is a skill that goes a long way toward giving us peace of mind. This is part one of a two-part series about the way I handle accounting and finance on the household level.

Karisa and I used to pay things out of pocket, splitting the bill and getting it paid on time. This was a drag, because I would put the bill on my desk and then remind her that I need the money for the bills on payday; then I’d have to deposit the money so I could write a check. There would be weeks when we had no money because the Internet bill and the phone bill were due at the same time, we had to buy groceries, cat food, and cat litter, fuel for our car, and then we were wiped clean out.

One day, I proposed that we make a budget. This was an idea that Karisa had brought up before, but I had to get an idea of how I would do it in my mind. I sat down and drew it all up on a piece of paper, with a calculator, and showed her what I had come up with. The plan looked good to her: each week, both of us would put in a set amount of money to the joint checking account; the bills would be paid on time, and there was money set aside for groceries.
I ran the budget for about six months on paper before I sat down on a Saturday morning and made a spreadsheet template (mainly so that I wouldn’t have to spend half an hour setting up the paper sheet anymore, but also to save the planet.) This is what it looks like (click it to see it bigger):


I love using spreadsheets for this purpose, primarily because you can have it calculate your budget for you; all you have to do is enter numbers. I’ve gotten to the point where I can make six months of budgets in advance, giving them the rare tweak if necessary. This is the layout I use:

The top portion:

The top portion is for essential data. It takes into consideration paydays, expenses; and money coming into and leaving the budget. Some of this information is now what I would call “legacy” – a euphemism for “possibly unnecessary to my strategy at this time,” but I like to stick with what works until I’m sure. Here’s a section-by-section breakdown from left to right:

Paydays: I originally did this because I would put in two weeks’ contribution at a time because my pay comes every other week. Eventually I developed a way around this that involves hiding half of my pay in my checking ledger (you’ll hear more about this strategy in the next part of this series) so that I can contribute on a weekly basis. This has since made things much easier, and the paydays section is like an arcane law that nobody realizes is still on the books. Eventually I’ll take it out, but I just haven’t yet because I use it to fill in the dates on the weeks sections. Isn’t that a weak excuse?

Expenses: We originally used all three lines in this section, but now we have two cars and so we each pay for our own gas. The “Other” line was one I put in for cigarettes because we used to share packs, but we both quit last year, so I left it in just in case we need to budget something in on a short-term basis. These three lines are formulated into the “Each pays” and “Save for bills” lines in the weekly sections in the bottom portion of the sheet.

Bills: This is where I document allocations for bills. I usually take the bill from the previous month, round it up to the nearest dollar, and put the amount in the appropriate box. The due days are the same from month to month, so they’re in the template. Obviously, this works best if the bills don’t fluctuate too wildly; but if you allow for a surplus cushion, the practice of allocating the amount from the previous month’s bill should help offset any modest, unexpected overages. When the bill goes back to normal the next month (hopefully) you will be able to reclaim the lost surplus from the over-allocation of the bill. Trust me, it works.

Budgetary input: This is important. When you have bills due in the middle of the month, but you do your budget a month at a time, you might have money leaving the previous month’s budget and coming into the current month’s budget to pay for those bills. For us, the three bills shown all carry over, and so require special treatment in the weekly sections in the bottom portion of the sheet. This is also where I keep track of the budget surplus and it’s growth or shrinkage from the previous month (this might change soon, as I have designed a new expanded account ledger to take over this function). The “Total in:” line below the box calculates the four amounts lined up above it with a simple =SUM(M4:M7) equation.

Budgetary output: This is the yang to the input’s yin. Obviously, it’s the money leaving the budget to go to the next month’s budget. I don’t fill in the surplus until the end of the month because honestly, I don’t know how much it is until after the last Friday of the month. Again, the total line under the box is a =SUM(R4:R7) calculation of the four lines above. The numbers in the box get entered into the input box of the next month’s budget.

The bottom portion:

The bottom portion is where I calculate the allocation of each week’s contributions and keep pertinent notes. Here, the devil is in the details; that’s the reason I chose to switch to a spreadsheet – to reduce the possibility of human error – but it doesn’t mean one shouldn’t double- and triple-check the budget before using it.

The weekly sections:
Depending on the month, there will be four or five weeks ending in Friday. Because my wife gets paid weekly, I opt to do the budget on a weekly basis. If I were single, I could reasonably switch this budget to a two- or three-week budget because that’s how many times I get paid in a month. But if I were to ask my wife for three or four hundred dollars every other week, she would end up miserable and then so would I. So, needless to say, it’s better to tailor the budget to the highest pay frequency in the household. One solution, like I mentioned in the Paydays section, is to have the person with the lower pay frequency pay in multiple weekly contributions (because that makes sense). I found a more elegant solution, but it might just work for me because it’s my pay and I take care of the budget, too. Either way, there has to be a lowest common denominator for making contributions to the budget, and the easiest time for a person to part with a chunk of their loot is on payday.

When I set up the budget, I fill in all the values for the bills that are lined up under the date (each date being a Friday of the month.) There was, originally, a reason for the break in the bills section. it was intended that bills that were accounted for only within the month itself were in the top group and bills that had money rolling in from the previous month were in the bottom group, but when I added in Hulu Plus in November I accidentally stuck it in the bottom portion and haven’t fixed it yet. I calculate each week’s contribution for all of the bills in the top group (and Hulu Plus) by taking the allocation amount in the Bills section and dividing it by the number of budget weeks in the month (in the illustration’s case, that’s four.) This way, the bill is saved for throughout the month. I fill in the values myself, because it’s pointless to put in formulas when the number of weeks can change from one month to the next. The bills in the bottom group (except for Hulu Plus) get calculated like this:

(Allocation – (budgetary input amount)) / (number of weeks until the bill is paid)

Take Verizon, for example.

($195 – $48.75)/3 = $48.75

It makes sense, because I calculated the amount that I would need from one due date to the next on a weekly basis in the previous month (this is why I now do several months at a time – because it’s a flow.) So you can reasonably assume that I only paid in one week on the previous month. But don’t take this for granted by just using that number again – always re-calculate when making the next budget. Then check it, and check it again.

The column of bills in each weekly section (or each period) is formulated with the grocery money from the Expenses section in two amounts that are crucial to the budget:

Each pays: This is self-explanatory. My wife and I both deposit at least this amount into the joint checking account every Friday. This is the exact formula I use: =(SUM(B17:B20)+SUM(B22:B25)+SUM(E4:E6))/2

Essentially, the sum of the top group of bills plus the sum of the bottom group of bills, plus the sum of the expenses column in the top section, split in half. We can see, this is why Excel rocks the block.

Save for bills: This tells me how much money to set aside for bills, two methods for which will be explored in the next part of this series. This is the formula: =SUM(B17:B20)+SUM(B22:B25)

Take note that this is actually a portion of the formula used to calculate the weekly contribution amount; it’s just the sum of the bill allocations for the period.

At the end of each week, I balance the joint checking ledger and the Save for bills amount is essentially subtracted from the available balance of the account (again, this will be explained in greater detail in the next post) along with money that’s already out – so we can’t spend it by accident. And actually, when it’s not shown in your ledger’s available balance, it’s harder to spend it on purpose, too. I pay any bills (mostly online) out of our checking account’s bills balance, and I mark them as paid on the sheet. Then I write “Completed” and the date underneath the column for my own reference, so that I can see that I’ve finished dealing with the weekly budget.

A word on format: Like I’ve said, every month can have four or five weeks, or if you get paid every other week, it’s two or three. I use a single template that I designed for the budget sheet that has five weeks on it. When I start a new month, I fill in headings and rote amounts, but I also have to re-arrange the bottom section based on two things: 1) how many periods there are this month, and 2) when the bills are due. I first take out the last week in the template (by clearing the contents of the cells) if necessary, and then arrange the weeks so that there is a space (not counting the very small columns) after a week where one or more bills are due, so that I can write “PAY” in the space after that bill, after that week. After I have paid the bill, I change it to “PAID” so that I know. It’s good to keep track of these things. When I have to move these things, I move one column at a time so that nothing disappears in one of the very small columns. Any modern version of Excel or OpenOffice Calc will change the formulas so they still work, which is another reason why Excel kicks butt. It’s almost effortless.

The notes section:
In the notes section, I keep track of three things: when our car insurance is up for renewal (because we used to pay it month-to-month, but we decided to pay the whole premium for the discount,) the differences between what I’ve allocated for a bill and what we actually pay for that bill, and any extra money we have from the grocery money at the end of the week. I absorb all these amounts into the budget surplus, which is just good budgeting. We’re actually trying to work up to a $3,000 surplus so that if anything goes catastrophically wrong, we can have a two-month cushion to keep us from going insane. While it’s true that I could simply absorb these things as I go and calculate the surplus at the end of the month by subtraction (as the box in the top section does) – and indeed I did this for the better part of a year – I decided to start keeping track of where every penny comes from.

This is also good budgeting. This way, if the surplus goes down and someone gets unhappy about that, you can show them which bill wasn’t allocated properly for because – I don’t know – someone kept leaving the hose on all night or something. That’s just an example, it doesn’t actually happen to us. If you keep track well enough, the amounts should balance out perfectly with the amount of change in the budget surplus in the budgetary output box.

At the bottom of the sheet, I keep other notes as necessary. My wife’s hospital bill actually comes out of her money, but having it in it’s own place on the sheet reminds us to pay it every month. The surplus growth goal was my wanting to get back where we were the day we moved into our house in December, because we lost surplus when we had the Internet installed, and – I don’t know, something else threw us off track. We had that cushion, and that was nice. But you have to try to build it up when you’re not using it, too!

Karisa and I know what to expect. Rather than living from check to check, our bills are paid on time with almost no effort and so we can forget about it and focus our energy on more important things, like helping Niko in his search for a better mousetrap (I tried to uncover the flaw in his thinking, but he just doesn’t seem to understand that you have to have mice to trap.) What’s more, we have money to fall back on, and we’re building a nest egg. Wins all around.

Looking ahead: in the other part of this series, I’ll discuss my previous method for “hiding” funds from the available balance in our joint checking ledger, and my new spreadsheet-based method for allocating funds rather than hiding them. We’ll learn how to use these methods of organization and record-keeping to build financial discipline in ourselves and to make our budgets successful.


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