How I Make a Budget!
Posted by Gail | Filed under Budgets
Everyone wants to know how I come up with the amounts I put in people’s budgets. Even though I’ve put the interactive budget worksheet and instructions on this site, people are still writing to me, burying me in numbers and asking me to make them a budget. Or they’re asking me for guidelines on what they should be spending on things like food.
Making a budget is a bit like doing a puzzle… you have all the pieces, and you just have to get them all in the right place. Maybe that’s why I enjoy it. But making a budget doesn’t always mean getting it right on the first go. Sometimes you have to move those pieces around to make it work.
The first place to start is just to throw the numbers on to the budget worksheet and see where they all settle. That’s what I ask couples to do when they’re sending me their info (for the show)… I want to see how they think they’re spending their money. In every single case but one (Nicola from Season 1), people haven’t had a clue where their money is going. That’s why I tell people to do an assessment of how they’ve been spending their money. You can do it one of two ways:
- Track your spending for a month or three, or
- Review your spending for the past six months. This is my preferred method since six months’ worth of info is far more revealing.
Okay, so let’s say I’ve got some numbers to work with. I plop ‘em into the budget. Then I set to work making it balance.
When you compare the Original budget with Gail’s budget you’ll see some significant differences. Here’s my process.
When I look at the bottom on the Original budget I can see the over-spending problem in black and white. So I start by dropping in all the Fixed Expenses, keeping them the same.
Next, I add in the money this couple should be saving for emergencies, their long-term retirement needs, and their two kids’ educations. These “savings” amount aren’t after-thoughts… they go into the budget right off the bat.
I also look at the amount going to debt repayment, and if it isn’t enough to blow off the debt in 3 years or less, I up the amount until there’s a light at the end of that tunnel.
Next, I drop in the Variable Expenses, adjusting the amounts down until the budget balances. Some things I kill completely. If you’re in debt, you can’t afford booze, cigarettes, chips, coffee, lunches out. You will have a very limited entertainment budget, and you’ll have to have all your fun (sports included) out of that money. Food gets chopped back, but not to an unreasonable amount… it’s important that everyone eat well. But that means no one gets to eat out!
When I look at the bottom line, if the budget still doesn’t balance, I go back over it looking for other places to cut back. This is when the Fixed Expenses come under the knife. Cut your cable. Cut your phone bill. Cut your utilities. Consolidate your car and home insurance, raise your deductable and cut your insurance premiums.
There’s no such thing as “cash” anymore since that’s not a real budget category. Some people like to give themselves a “cash allowance” that they can spend any way they want, but that’s a license to shop unconsciously. If you’re spending the money, you should be thinking about it. You had to work hard for it and no unconscious spending is acceptable, particularly when you’re in debt.
There are some categories people cut back on so the budget will balance, knowing full well that they’ll have to spend the money even if it’s not in the budget! They create a budget they know won’t work because they don’t believe any budget will work. So they leave out categories like clothing, home maintenance, fun, family gifts, medical, and car repairs. People, crap happens, and some things you need to spend money on just because you do. It makes much more sense to make a plan and stick to it, than to make a plan you know won’t work. Yes, you may need to adapt on the fly if your “car repair” money hasn’t built up enough to cover the cost of the new tires you had to buy. But it’s unlikely that you’ll have to buy new tires, repair the roof, buy the kids new shoes, and cover a birthday all in the same month… so as long as you have enough of a “float” in those we’ll-spend-it-eventually categories, your budget will work.
Okay, so that’s how I do it. There are no formulas… it’s a matter of what each person or family needs. While one family may be able to survive spending just $100 a month on gas, another may have to spend three or four times that… so there’s no Right Amount Rule for any category… it’s a matter of need and the amount of income available.
The bottom line is that you can’t spend more money than you make. If you can’t get the budget to balance you either cut costs or make more money. Debt has to be repaid. And you have to save something both for emergencies and for the long term.
Once this family is debt free, the $1,400 used for debt repayment can be reallocated to increase savings, plan for bigger purchases – new furniture, bikes for the kids, a vacation – and to create wiggle room in the budget. Upping categories like maintenance and entertainment by 25-50% means more money available to take care of problems and have some fun.
May 25, 2009 at 7:46 am
My routine is key for me…I know exactly how my money gets allocated and I don’t vary too much from it. It’s GREAT when you’ve paid off something (car, credit card etc) and the money that was put towards that suddenly becomes “free”. At that point, assuming everything else is paid, you can start having abit of fun.
I love my routine…it keeps me happy.
May 25, 2009 at 7:59 am
My budget is so detailed that it is on a Excel spreadsheet. I indicate the date the money is coming in and what will be paid from that amount – whether it be savings, debt repayment, mortgage, food, insurance – too the penny
We have two chequing accounts – one in which all money is deposited in and bills are paid from (I cannot access this by interact, so no impulse purchasing) and the second I transfer my variable spending in every two weeks (this can be accessed by interact). It is the same principle as the jars, I just use a bank account instead. Once the money in that second account is used up, I have to wait until the next “payday”.
If Gail ever audits me, I could just email her my 2 1/2 years worth of spreadsheets – that is how long it has taken us to be almost debt free – yeh us!
May 25, 2009 at 8:31 am
I wrote out budgets for years! But that is all I did…wrote them out. I’d stick with it a few days or quite possibly even a week and then it would all go in the toilet and I’d spend however I want anyways. Honestly, I think I Just liked writing out the numbers in the categories LOL but the categories were never realistic. I got semi-serious last summer when I discovered Gail’s Til Debt do us Part and started actually understanding a few things about money. I started my blog then but I still spent without thinking. By Nov 2008 I was ready to get serious about things and spend that month making a realistic-ish budget for my income/expenses and in December I started with the jars. I’ve tinkered with it a few times since but it’s working pretty well. Today is Month 6 of the jars. 6 months!!! I haven’t stuck with any habit for six months unless you count gluttony
Thanks Gail for continuing to teach this old dog some new tricks.
May 25, 2009 at 11:12 am
Three years ago we tracked every penny we spent. After 14 months, we stopped…then got caught up in ‘the stuff of life’. I’ve been tracking spending again for the past 7 months and the trends show me some very insightful things about ourselves. Namely – I’m spending what I think is too much money on supplements. SOooooo…I’ll cut back on some ‘nice to have’ but not essential immunity booster supplements and rechannel these funds to the savings fund.
Each month $100 automatically goes to our Tax Free savings account, $220. goes into our son’s RESP, and $225. goes into our savings account. My employer also holds back 20% of my salary (for 4 yrs – then I have a 5th year off with my own forced savings).
May 25, 2009 at 11:24 am
One thing I did when I set up my budget was to recognize where I would end up spending money (mo matter what) and made that a fixed expense. Others may not see it as such, but since the budget has to keep body and soul sane, this was the best approach for me. The other categories got cut back as needed to make the budget balance.
My message: Know what you already spend and know which sacrifices you are willing to make.
May 25, 2009 at 11:30 am
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May 25, 2009 at 2:03 pm
Crap DOES happen, very very expensive, ugly crap.
I am so glad that I have been living with Gail as the money voice in my head for a while…. this weekend my 12 year old son had a little mishap on his bicycle. No broken bones, just completely smashed out front teeth…. They are his adult teeth, and the first thing the emergency ward doctor says to me is “this is going to be expensive”.
We don’t have much dental coverage, and already there was the after-hours emergency dental surgery and it will be a week before we know how many teeth were killed when the bone broke. It is devestating to think his handsome smile is ruined. The dentist said he will certainly need (at least) one root canal and may need several prosthetics as he grows.
$$$$$
Thanks to Gail’s sage advice, we have an emergency fund saved up, this painful experience will not have to go on credit!
May 25, 2009 at 2:15 pm
Great re-cap post Gail on how you set up a budget.
The sticking to it is always the hardest part for me – but it will come!
May 25, 2009 at 2:25 pm
*pol – ouch! hope you’ll all be smiling again soon.
May 25, 2009 at 3:07 pm
I also find I have no problem writing up a budget, but following it, is a completely different thing. I’ve been trying to keep track of all my spending since the beginning of the year and some months I do great, other months, I completely blow it!
Re-starting the jars June 1st and hopefully I can stick with the jars, the budget, and tracking. I will stick with it this time!
May 25, 2009 at 3:11 pm
I think it’s fair to research both what you *do* spend and what you *should* spend. When I started working on my budget (work in progress! I am more of a planner than an implementor) I used my bank account history and credit card history to piece together what I was generally spending my money on over the last 6 months. Then I researched how various people recommended you divide your money (%s) to get an idea of how I should be spending my money vs. how I was spending my money.
Obviously, you need to prioritize based on your current situation and your goals, but I found it really helpful.
May 25, 2009 at 3:45 pm
After making the final loan pmt the beginning of May, I am happy to report this is the first month in YEARS that I have not gone into O/D! I used to wonder how I could fill up my jars for the upcoming month when I was busy trying to catch up from the previous month (always a month behind), but for June I’ve decided to take some good advice from others here and put a float on my PC credit card so I can still collect points AND not have to catch up next month for this months’ groceries.
I’m so excited about the road ahead…a small (very small) EF is growing by leaps and bounds the 3rd of every month, my RRSP is continuing to grow again, the kids RESPs are RESPectable (oh, they’ll still have to work or take out some loans, but it won’t kill them to learn to budget for repayment of things when it’s their turn I’m sure…between Gail and me, we’ll learn ‘em good!), AND the debt is still being aggressively paid down.
I’ve not felt so secure in a long time. I still have things to work on, like one of the other posters with her supplements, I too am a vitamin and herb junkie rather than a clothes horse I guess. But I’m learning not to go into a panic when I can see the back of my pantry (not that I can yet, but we ARE getting through cereals now before I go buy 5 more boxes just in case the sky falls tomorrow).
May 25, 2009 at 4:21 pm
I don’t necessarily use a “budget” per se. I track my expenses, but have no hard/fast rules about spending this much money for this sort of thing. For me, it’s less about a rule of what I can spend where, and more of a “this is how much you have for the month, divvy it up as needed”.
I have monthly goals, but because I track all my expenses and know where my money goes, I also realize what is realistic spending for me – I go out for a nice meal once a month, see a few movies, and take dance classes. Once a year, my boyfriend and I plan for a nice (but cheap!) vacation, but I use my “extra” pay for that, and put the rest of that into savings or loan. Not having dependents (neither child nor pet), a car, or a home to worry about though really changes my situation, since I don’t have as many emergencies cropping up as other people do.
My “budget” is more like “$200 for entertainment (eating out, movies, theatre, shows, etc), $50 for shopping, and $45 floating cash for medical/toiletries/transportation (outside of the metropass)/gifts”. If there’s anything left out of that (and normally there is), it will end up into my savings. I think my worst habit is going out for ice cream every few weeks, or bringing treats into the office!
Some months I allocate a little less to my student loan (given that I’m putting around 36% of my take home pay against it every month) or a little less to my savings (at least 11% each month, usually more, since I don’t spend all my money each month), depending on what expenses come up during the month.
For example: I have my brother’s wedding in a few months and suddenly, I have a bunch of expenses (like dress, shoes, wedding gift, shower gift, etc), and I’ve planned the spending into my each month that I’ll need the money for – but that means taking a bit from my loan repayment amount. Given that my loan is still scheduled to be paid off by the end of 2010, I’m not concerned, and if I end up taking an extra month or two and go until January/February of 2011, it will still be just over three years from when I graduated to when I get it paid off.
May 25, 2009 at 4:22 pm
I stared using a budget in feb of this year. Because i didn’t want to go through endless months of paperwork i joined quicken online. I downloaded three months of prior transactions for all my bank/ credit accounts. It tells you your average monthly amount spent per category and you can set spending limits. I am no longer using the program because i didn’t really like it, but it was a great starting off point. Because i had realistic numbers to start with (instead of just random numbers in my head) i have been able to stick with it since february. That breaks the old record of about 2 weeks! Like some ppl from above i really do enjoy planning more that implementing.
May 25, 2009 at 8:40 pm
My current budget spreadsheet goes back to 1995. (The one going back to 1993 was corrupted and couldn’t be salvaged.) I’m 29 now, so you do the math. Is it weird that I enjoyed playing with numbers since then?
May 25, 2009 at 8:58 pm
pol i took out the school insurance which is very very cheap (40.00 per year per child) and when my daughter chipped her two front teeth on the bottom of the pool and the other one chipped her tooth on a teetertotter and then broke her leg ice skating they covered everything. Even gave us 100. for breaking her leg. Do you have this insurance?. When i spoke to the people involved with the school insurance she said only 25% of the people given these forms in september actually register with them.
You should look into it in september. They cover your child as long as they are in school. Even in university.
Great site Gail. Love the posts.
May 25, 2009 at 11:35 pm
I started living on Gail’s budget in February and have found it easy to follow and for the first time I not only have an emergency fund (3 months expenses so far) but also a fund for home maintenance/repairs. Thank you Gail!
It’s no wonder that people get confused…just today on a Calgary TV breakfast show I watched a so-called “money expert” say that if you have debt you should be paying it off and NOT building an emergency fund or other savings until your debts are gone. HUH?
Following advice is partly what got me into trouble over the years, because I was so worried about paying off our mortgage (which we almost have) and maxing out my RSP that I did not save for emergencies or home repairs. Then every time something happened we had to use credit to pay for it, only going further into debt. Thankfully now I have no consumer debt other than a car payment, but that was not the case for many, many years.
I much prefer Gail’s way of thinking….I might not have my house paid off as fast, but at least if something happens to me I won’t have to go in to debt to save myself. Gail, you ROCK!
May 26, 2009 at 1:10 pm
Gail, I
I absolutely LOVE your show. I have often wondered if you keep track of or go back to some of the people who have appeared on your show to see if they continued with your plan and whether they eventually were debt-free.
June 1, 2009 at 11:20 am
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February 27, 2010 at 9:20 pm
Hi Gail,
My husband and I have recently bought your book and are working on it together. Right now we are filling out the “Build a Budget That Works” interactive worksheet and we have a fixed expense of Spousal/child support. Where should we put this? Thankd for your help!
C
February 28, 2010 at 12:07 am
Crystal – you can do one of two things. Either make it it’s own piece of the pie, or add it to the ‘life’ slice. If it was me I’d create a new piece by borrowing from the other pieces. So if it works out to 5 percent of your net pay then take 1 percent from each of the other pieces. I’d be reluctant to make it part of the ‘life’ piece because I know Gail would say that you have to have fun too!
All the best and welcome to Gail’s community