A better budget looks forward.
But first, let me tell you why traditional budgeting drives me batty by looking backward!
- The past is no indication of the future. Just because you spent $97.21 on gas last month, doesn’t mean you are going to spend the same amount next month.
- Expenses vary widely each month (excluding fixed bills like housing, cell phone, or car payment). A plane ticket eats up your cash one month, while gifts or a new outfit may eat up your dollars the next.
- Most non-fixed expenses are hard to predict, and thus are hard to budget for.
We all know budgeting is smart. But for years I struggled with it. I spent hours pushing paper and writing down what I spent, trying to make the income number bigger than the outgo number. I used a fancy excel spread sheet that a financial planner gave me that automatically summed built-in categories. It even had a plan of attack for “irregular expenses” that had me chasing after all the one-time expenses from the past year and dividing them by 12 and depositing that much each month into a special account. At first, I was so thrilled with this system I pushed it on others.
But it, too, failed.
The spread sheet was extremely good at helping me figure out where my dollars went. But it made no attempt to keep my spending in check. And it couldn’t predict what I needed to save money for – airfare? wedding gifts? bicycle repairs?
When I left my steady job to launch BargainBabe.com I had to do something. Namely, figure out if Hubby and I could survive on one salary. We weren’t going to have enough regular income to cover our past spending habits, so I focused on absolute necessities and bills we were going to have to pay no matter what. This included:
- gas and electricity
- Internet and cell phone service
- gasoline (two full tanks only)
- doctor visits
- savings to max out our 401(k)s and IRAs
I subtracted these necessities from our income.
Then I made a second group of expenses for all the irregular items that come up, including car insurance, car registration, car repairs, dental visits, Christmas presents, magazine subscriptions, charitable donations, vacations, yoga passes, and oil changes. I looked at what we spent on these categories last year and estimated how they would change in the coming year, then I divided by 12. (Okay, looking backward is occasionally necessary – and useful).
I set up an automatic withdrawal from checking to a special ING savings account to cover our irregular expenses when they come up.
After subtracting the absolute necessities and irregular expenses from our take home income, I’m left with our discretionary income. This number is very important because it represents the actual dollars we have to spend each month. All my other dollars are spoken for.
Discretionary dollars go toward:
- bus fare
- extra gas
- movie tickets/entertainment
- meals out
- hair cuts
- home maintenance
- gardening supplies
- and everything else!
Once you figure out your discretionary income you are nearly done. The last step is to grab an index card and put this number at the top. Each time you spend, subtract it from the total. In lieu of an index card, use SmallSpend.com on your mobile Internet device.
This way you know exactly how much money you have left each month and do not spend more than you earn. The first month I tried this forward looking budget, my credit card bill dropped by more than $2,000. Hallelujah!
This system is also MUCH less time consuming because once you calculate your discretionary income, you only have to write down each purchase. And that makes it easy to say no or wait for a better price!