While no one method fits every family, we have adapted some good budgeting principles which help us track expenses and plan for larger purchases.
First, purchase a good software package to track expenses and manage your different accounts. I use Microsoft Money, which came installed on my computer, but inexpensive home budgeting software is available at any office supply store.
I log every account, including banking accounts. Instead of using the check register, I use duplicate checks for easy entry later. Having accounts online enables conveniently produced reports for tax purposes at year end, as well as monitoring expenses at any time. Assign a real category (not Miscellaneous) to every expense entered.
I also do banking online. While I do not pay my bills online, I use my bank’s free online access to transfer funds and monitor balances. Monitoring bank accounts online helps avoid overdraft situations.
The Annual Expense Log
I built a spreadsheet listing our monthly expenses for the entire year by category. I use a simple Excel spreadsheet with each month as a column and each spending category as a row. The spreadsheet fits on one page, and can be updated as new expenses arise or old ones change in amount. I look at the prior year’s expenses by category based on reports from my budgeting software to establish monthly totals for each category on the spreadsheet.
Tracking expenses for the entire year allows me to see quarterly expenses, such as life insurance and sewer bills. It also shows seasonal or annual expenses, or categories that vary by season, such as the electric bill. The spreadsheet provides an automatic tally so we can see the total expenses as they fluctuate month to month.
Monthly Expense Listing
Prior to each month I copy the monthly expenses from the annual expense log to a monthly listing. I include blanks for any unplanned expenses, such as plumber/electrician or auto repair. This list has three columns: the expense category, the expense amount, and our remaining balance for the month.
I start at the top with my net pay and then subtract each category. If we hit the bottom with a positive number we have a surplus which can be used to either save for the future or pay down any debt. If we have a negative number we know we need to shift expenses or transfer money from existing savings built from prior months’ surpluses.
Monthly Expense Envelopes
We found our debit card was a real budget buster and too often leaving us with days at the end of the month without money. So we minimized our debit card use and take out cash for miscellaneous expenses, such as entertainment and personal walking around money. This cash is entered in our software as specific categories.
We place the money in its respective envelope. When going to a movie or out to eat, we grab the money from the envelope, putting any change back into the envelope. When the envelope is empty, we are done spending until the next month.
Tightening our Belts
It had been too easy in the past to cover excessive spending with our credit card, but it becomes too easy to let the balance grow when the surplus months are not sufficient to cover the shortage months. So we limit our credit card usage to vacations, knowing we have saved in advance to cover the bill once we return.
We also try to build in saving for seasonal expenses like Christmas and Spring yard work. We also save for small emergencies like auto repairs, and special purchases such as new furniture. We find that by determining in advance where each dollar is spent, we no longer have money “disappear” and not be available when needed later.
We have not eliminated fun things like movies and dinner; we just manage them to control our spending. Each month we become a little better at tracking our expenses. Each year we become a little better at forecasting our expenses for each month, using the previous year’s experience. While we have not been hit as hard as some people during this downturn, planning our spending and trimming the fat from our spending has yielded peace and lessened stress.