Practically Speaking: How I Make My Annual Budget

 

I was asked last week to share how I worked up our annual budget.  I first did this years ago and I've just followed the same pattern since then.   These days, it's really just a matter of updating figures, increasing what has increased (usually expenses) and decreasing what has decreased (too often income!).   Then I adjust my budget according to what is needed to manage our expenses each month.

Initially the work to set up a budget is going to take some real work but unless things drastically change you should be able to continue to use the same budget with adjustments made in the proper categories year after year.

I like to use an actual ledger sheet but just a sheet of notebook paper will work, as well.  It's the trained bookkeeper in me that likes to see the neat columns on a ledger sheet.  You can find them online to print for free, but I usually just buy a book of them at Walmart for less than $3.   I also use these pages as my check register since it's so much easier to read and find items upon than the tiny registers that come with our checks.

First list your income and all sources of it.   All figures listed below are purely fictional...

$1900

Then we list what we pay monthly.  For us the next category is our tithes and giving.  

$175  

Then list your Fixed bills/expenses in order of importance.    These are the expenses that remain the same each month and neither go up nor down.   Mortgage, Car Payments, Insurances, Cable, Phone, etc.    By those payments which are fixed put the amount you must pay monthly.  

$125 phone/internet

For unfixed expenses, I went through my check register to see what we'd paid each month and added up the annual expense in each category.  Then I divided that by 12.  So electricity, water, groceries, Gasoline for the car were averaged.  That means that some months in the winter, I'm setting aside more for electricity than I need.  I set the excess funds aside and hold on to them until Spring when our bills increase.  Monthly I set aside the same amount but I tend to have an overflow that covers summer months. 

Electric $200

Groceries $325 

Gasoline $125

What now?

I have what I call sub-accounts.  Some others call them sinking funds.  I take all my annual expenses and determine what we typically spend each year.  Then I divide each item by 12 for a monthly average and set that money aside.   Again these are funds that show in our bank account balance but which we do NOT touch until we are paying that bill.  For others it might well be money that is put into a savings account and held on to until required for payment.   

I pay our car and house insurance payments every six months and once a quarter respectively.

Car insurance $100

House Insurance $125

Car tags $10

Property Taxes $100

Pest Control $25

Life Insurance $200

Rxs/OTC $50

Household Maintenance $100

Car Maintenance $50

Gifts/Bdays $40

Allowances $150

If you subtract these figures from my beginning 'income' of $1900, you'll see that at the end of the month they come up to $0...I run a $0 budget each month.  But my bank balance never falls to $0 because I am continuously adding to sub-accounts.  

You might also note that I have only round figures listed.  I round DOWN all deposits and round UP all expenses.  So if my income is $1900.99, I make it 1900.   And if an expense is 124.12, I make it $125.   This excess change builds up a small balance as well, that's an added cushion.  Finally, we try never to bypass the balance we had at the end of the month.  If my check register says I have $500 at the end of the month, then I start from zero the next month.  I do everything within my power to be sure I don't touch that $500.  More added cushion.  

For those items that we don't necessarily use every month: insurances, pest control, taxes/tags, maintenance accounts and prescriptions we generally have about $575 a month in our account over and above what is needed, not to mention any leftover money from gasoline or electricity.  That balance builds each month, so by the end of six months we're carrying a nice bottom line, but my check register is what we live by, NOT the bank balance.

This is what allows us to pay our insurances in quarterly and six month installments.  I simply set aside a monthly amount in every category of our budget.

You might ask at this point, what about credit cards?  We have two cards we use each month.  One is a gas card and one is a standard credit card.  We use both routinely...How do we make payments?  We treat every purchase on those cards as CASH.  Each time we use the card it is written into our register and the balance is removed from the category that the item falls into.  If it's a personal expense, it comes from my allowance balance.  If it's a gift, from the gift category.  Gasoline comes from our gasoline sub fund.  If it's related to house or car maintenance it comes from those funds.  I order pet food and some items like coffee or vitamins from online sources and those items come from the grocery or prescription/OTC funds.  I pay both cards in full every single month because the money needed is already subtracted from each category.  Because of the way the credit card bill comes in, I have the opportunity at the start of each month to subtract those items directly from the related category and what is left is what we spend.

If for any reason we have increased income (as we did when John worked and had he occasional overtime) I would sock away the extra income funds in one or three sub accounts so that we might have two years worth of house insurance or car insurance money and this helped us stretch our income over the times when it fell below the average.  

Our categories work for US.   Budgets are so individual and must take into account what your life and your household is like.

I keep track of what is in each sub account monthly. 

When I am trying to balance my checkbook, I don't balance it to the penny as I did in my bookkeeping days but I do try to keep it within a limit (say $40 more or less than the balance that shows on my bank account).  I take the bank account balance, subtract the sub account balances, the check register balance and any checks that haven't come into the bank yet.  I'm usually pretty darn close to my check register balance when I'm done.  If not, I can adjust our check register balance but I rarely have to do that.

Occasionally we've borrowed an expense from a sub category and then repaid that fund rather than use savings.  For instance, when we had the two deer processed this year, it was an expense that couldn't come from our grocery budget.  Mid month our grocery budget was done!  So we borrowed from another fund and then I've added a small amount from our grocery budget back to that sub account and will keep doing so until we have that paid for.  

It requires a lot of discipline to run a $0 budget!  If this is not possible for you then you might consider moving the subaccount funds into a proper savings account at another bank you seldom visit or can't get to too easily and make a deposit to your main account when it is needed.

I am sure there are people on YouTube that can explain this far more clearly than I do.  It all sounds a bit muddled but it has worked for us for over 20 years and has kept our bank balance looking healthy which is good for our credit.