Friday, March 8, 2013
Finance Friday - How We Budget
I make an excel spreadsheet for the calendar year and make a column for each payday, which for us is 26 columns. I aim to balance out all of our bills over those 26 columns for the year. Many people with biweekly pay, pay half their bills from the first payday and their other half from the second payday of the month. This leaves them with 2 "Free Checks" per year. I personally am too tempted to spend that huge chunk of extra money twice a year, so I prefer not to do it that way. I would rather save smaller chunks of money all year long than to think I am going to save those extra checks, only to have them slip through my fingers.
Our biggest regular expense is our house payment and it is automatically withdrawn from our bank account on the 6th of each month. We don't look at 3 pay months, but instead look at which 2 months have 2 paychecks between our house payment withdrawls. For example, March is a 3 pay month for us (3-1, 3-15 and 3-29), but we don't actually benefit from it bill wise until July. Our March house payment comes from our checks on 3-1 and our April payment comes from out checks on 3-29. This doesn't put us ahead for March. Instead we need to look ahead until June and July. Our June house payment comes from our 5-24 pay and our July payment (would) come from the 7-5 pay. The interesing twist is that our house will be paid off with the June payment (WOOHOO) so it doesn't really matter this year. Assuming we still had house payments that extra money would be budgeted for our annual homeowner's insurance which is due in July since we would have had an extra paycheck between house payments.
Some months we have 2 checks between our house payments, sometimes we have 2 checks between our life insurance, sometimes it is 2 checks between a utility or 2. This helps to spread the bills out and better balance the budget for us. I started this method about 2 years ago when we began to automate our bills. I wanted to make sure I had money in my account to cover all bills as they came out automatically. I know what day of the month each bill comes out of my checking account so that I am never caught off guard.
Having spreadsheet for the year reminds me about all those irregular bills, instead of just having them creep up on me. Income tax preparation is in February, property taxes are March and September, homeowner's insurance is July, vehicle registrations in March, car insurance is March and September, etc. This spreads everything out and I can see the whole year at a glance. When I know a pay period is going to have a huge amount of extra bills (like September and March) I budget to carry money over from the prior paychecks and extra paychecks to fill the gap. I am budgeting carefully so the big ticket items don't creep up on me.
Now I bet you are thinking, so she just spends everything and saves nothing, but that is not the case. I believe I am saving much more than I would if I saved the 2 "Extra" checks per year. I also budget my saving throughout the year. Every month we save regular, set amounts for college and car replacement and a set percentage for retirement. Hopefully our next vehicle will be our first cash only purchase. We have a set total for bills on the spreadsheet each pay and an amount for variable spending and expenses. Several pays exceed this amount and the balance from those pay periods are also added to savings. Since I am saving smaller chunks (versus whole paychecks) all year long, I can see my balances grow, which is very rewarding. This in turn inspires me to continue saving.
You know Dave Ramsey says to start by paying off your smallest debt first, even if it isn't the highest rate. Mathematically it doesn't make sense, but the inspiration of paying off that small debt fuels the fire to help inspire you to keep in it for the long haul without giving up. I see my savings strategy the same way. Seeing those account balances creep up monthly inspires me to keep saving. It is also harder to take the money out because you know it was a process to get it saved. Those big checks are hard to put away and maybe it's even harder not to be tempted not take them back out for a splurge because they feel like found and/or free money.
Maybe this isn't for everyone, but it is what works for us. I can't wait until the house is paid off in June so we can really ramp up the savings. Our biggest longterm goal of having the house paid off before the kids start college is coming to fruition. This postions us to help the kids more, even though they will still need to take out some loans. In a society that is obsessed with keeping up with the Joneses I am sure we seem weird! I guess nobody informed society that the Joneses are clueless!