I always thought a budget was a budget was a budget. And none of them were fun. A budget was a boring, restrictive, mean spirited little taskmaster. Then I discovered the difference between a forecasting budget, a tracking budget, and a living budget. Unknowingly, we had used them all.
A forecasting budget is wishful thinking. Or I suppose ominous thinking depending on how you think your money will behave. Either way, it has never been very accurate for us.
A tracking budget is great when everything goes the way it is supposed to and you remembered every bill and opportunity before it arose. Otherwise it’s a mean little sprite that enjoys laughing and highlighting your every misstep.
A living budget is something else all together. It gives you the power to address forgotten bills as they arise and plan for them in the future. It doesn’t mock you when you overspend, it offers solutions for covering the expense. And maybe most importantly, it answers the most mysterious question of all. If I suddenly had no income, how long could we survive?
If you read our last financial post, you know that we use a program called You Need A Budget. That’s an affiliate link, by the way. If you click on it and sign up, we both a get a free month. If you love it as much as we do, you can continue for either $11.99 a month or $84 annually (pricing current as of 3/3/2020).
At first glance, it looks like any other tracking or forecasting software. It provides some suggested categories and headings, but it is completely customizable to suit your individual needs. I highly suggest customizing your categories and headings. Personalizing your budget is one of the ways that you bring it to life.
Before you can customize your budget, you need to know your expenses. These will vary person to person, and you will definitely forget something along the way and have to add it later. Don’t beat yourself up about that. It’s part of the process.
So speaking of the process, my process actually starts outside of the program. You can use a notebook or a spreadsheet to create your budget guide. Whatever you use, keep it handy because you’re going to use it every time you get paid and any time that an emergency arises and you need to instantly know what is really important and what isn’t. This step can be a little overwhelming…kind of like the first time you realized that you were the adultiest adult in the room. It will be okay.
I used a spreadsheet on the computer for a few reasons. It’s easy to add and remove categories without making my page a mess. It does all of the math for me. And most importantly, I can split my computer screen to show the budget and the guide at the same time.
Steps to Creating a Budget Guide
- Start with The Ugly. We actually have four headers here. Credit Card Debt, Other Debt, Bills – Monthly, and Bills – Annual.
- Now you’re going to create your amount columns. I use disgust as a motivator so I not only have the monthly amount, I also have an expanded yearly amount. There really is nothing like seeing your annual minimum payment total to make you want to pay off your credit cards.
- For credit cards, enter your minimum monthly payment–even if you plan on paying more each month. Remember, this is also your source for worst case scenario emergency planning so you want to know the minimum. For loans, put in the monthly payment. For bills, put in the monthly amount. Break down annual bills into monthly amounts as well. If you want to track annual amounts, just multiply your monthly amount by 12.
- Time to total it all up. You want to total each category as well as all of them combined.
These numbers are completely made up but, it should look something like this:
Steps to Creating a Budget Guide Continued…
- Time to add your living expenses. First, list your Weekly Expenses. Groceries, gas, laundromat, maybe even weekly appointments like speech therapy for my daughter. I have two different headers for this. Weekly Mandatory and Weekly Optional. For us food is mandatory, hair cuts are optional.
- Choose a day for your weeks to start. This will be important later. When we set our budget up, my husband got paid every Friday so Friday was the start of our budget week. You might want to put a note somewhere that this is your start day.
- Then add a new heading for Expected Expenses. This is going to cover things like vehicle maintenance and repairs. It’s not necessarily something that you spend every week but you definitely want to contribute a little whenever possible so you have money to cover it when it comes up.
- Total each of the groups and all of the groups together. Depending on what your current situation is, you’ll want to know all of these totals.
Remember, these are completely made up numbers. Yours will be different. It should look something like this:
A word about variable expenses. Some bills vary from month to month. You could certainly average them out and use that as your monthly amount. I’m a worst case scenario girl. I budget for the largest amount I expect to see and then either roll over any extra into the next month or use it to fund a fun category.
Then there are those annual goals. Don’t worry, you won’t be contributing to them forever. Somethings, like car repairs, only get funded until you reach your goal or to replenish after you use them. Other things, like Christmas, have time limits on them so you need to divide the total to figure out how much you need each month to have the funds on hand when you need them.
You’ve created your Budget Guide! In Building a Better Budget Part 2 we’ll talk about using this Guide to set up your categories and headers in YNAB.