Why A Budget Is Necessary
Before we started having financial issues I did not keep any sort of budget. Money that came in would go to my checking account and I would just make sure that at the end of the month as long as I was still in the positive I was good.
That, of course, was when my only real expense was my truck and rent. As we get further along in life we start to accrue items. A new car, a motorcycle, credit cards, utilities, these all come with fiscal responsibility. I used to calculate the amount owed on each, add it to my monthly fixed amounts and that is what I would use as a budget.
Spending Categories
I never factored other spending into the budget, items such as alcohol, restaurants, entertainment, clothing, etc. I just would not go to the bar when my money got down to a certain amount. Of course I was not saving anything either. If I had extra money in the bank after everything was spent I would put that aside for next month.
It was not until I was on the verge of bankruptcy that the financial counselor asked us to write down every expense. It was then that I realized how dire our financial situation really was.
It really is simple accounting, income – expenses= cash flow. Of course you want this to be positive. When I filled out the form my cash flow was negative and it had been for quite some time. This is why we were over $100k in debt and why we were told that there was really no other choice but to declare.
After bankruptcy, I started itemizing all our expenditures. I researched the best options and tried so many different tools. At the time there were not as many options as there are today so I tried a few online tools. The problem with many is they took time to build out the logic. I just wanted something simple.
Excel to the Rescue
Eventually I just started tracking my expenses in a spreadsheet. I had two columns, expenses and income. I would subtract the expenses from the income and add what was left over to the daily total. This is exactly how a check register works, for those of us that even still use checks.
The problem was this does not analyze spending trends unless you do the work. Recently I decided that I needed to just do the work. I modified the spreadsheet to categorize each item into the common, restaurants, health, pharmacy, shopping, utilities and used last year’s numbers to identify spending trends. From this I built out a budget.
And then realized another issue. This does not track credit card spending. Which is why the online tools are so essential. Adding in the credit cards at the time showed quite a disparity in my habits. When I travel I use my credit cards, when I purchase online I use the cards. Not reflecting this in the budget accounted for another few hundred dollars each month.
Now that I added in those amounts I see the true spending and have made adjustments to accommodate. As I pay down my cards I hopefully will not have those issues anymore and can build a budget based on actual spending.
Budgeting Techniques
I have also found out that budgeting on a two week basis makes it easier to analyze since the bulk of our income comes from biweekly pay. I still use the monthly numbers but the spreadsheet now reflects all amounts on a two week interval.
Whatever method you choose budgets are necessary and essential. You should realistically track your spending monthly across all accounts and adjust where necessary. By budgeting I have identified so much extra money that I have accelerated my debt repayment and will start putting more money into savings.
I already have a good emergency fund so my first priority is tackling the debt, but seeing the amount that I will have left over after all is paid off has given me hope for saving quite a sizable amount as early as next year.
I realized that I was avoiding budgeting because I did not want to admit the problems. This has changed and I now have a positive outlook on my finances and my future. You can definitely find the same happiness in budgeting, it is a choir but it is absolutely necessary. Afterall as other financial bloggers can admit, budgets are sexy.
Please list your favorite budgeting tools in the comments below. In my next budgeting article I will go through some of the tools I have been using.