Mastering Your Budget Week 2 - Identifying Your Planned Expenses
After you committed to mastering your budget, you opened a new checking account. Now it’s time to identify what your planned expenses are. Before you can automate your budget, you will need to know what your planned expenses are for a month. Grab your checkbook, computer, stack of bills, or whatever has a record of your monthly expenses.
For a refresher on the stackbacks budgeting system, planned expenses are the items that occur on a regular basis. Your planned expenses are things like your mortgage, utilities, cell phone bill, and student loan.
Next, decide how you want to store this information. A piece of paper or a notebook is fine. If you want to continue to use a software package, do that. I use an excel spreadsheet as I find it a nice medium between a complicated software package and a static piece of paper. I am providing an example excel spreadsheet.
Simply go through your past month, and write down the payee, amount, and due date from each of your bills. The date is going to be recurring, so just note the day of the month it is due. I also record whether or not it is an automated payment. This helps remind me whether or not I need to do anything come pay day.
When you have recorded all this information, add it all up. This is how much money you need a month to pay your bills, or your planned expenses. To figure out how much money you have at your disposal, subtract the planned expenses from your net income (the amount you get paid). Subtract an allowance from this, and that’s how much money you’ll have left over to play with.
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January 31st, 2006 at 9:01 am
I’m getting my planned monthly expenses. What about quarterly or yearly planned expenses? That’s an area where I’ve gotten mucked up in the past.
January 31st, 2006 at 9:14 am
Can I get some examples of what your quarterly / yearly planned expenses are?
January 31st, 2006 at 10:50 am
I’m guessing things like birthday/holiday presents, but also oil changes/car maintenance and home repairs that recur on a non-monthly basis (water/air filters, etc), and other things like that.
Basically any expense that isn’t monthly, but is still planned.
The best advice I’ve seen is pretty simple — just figure out the yearly cost of those planned expenses and then divide by 12. Just save that much each month and you should have enough to cover those expenses when the time comes.
My question is still this — what’s a good system for keeping track of those non-monthly expenses that you’re saving money for? It’s not “regular” savings and needs to be available readily when the time comes.
January 31st, 2006 at 11:44 am
Hi Andrew,
A good idea is to start an auto savings account and place money into this account on a regular basis. If you drive an automobile, chances are, you are going to need to spend money on it at an irregular pace. So this is an expense you can count on. The same holds true for houses. If you find you have a significant amount of these accounts, you may want to lump these into one account.
As far as birthday/holiday presents and other random things, I recommend two options.
1. Getting your planned expenses acount with a significant bottom balance. ie You have $1500 left over after all your bills are payed
2. Starting a savings account for irregular expenses. Stock $100 a paycheck away in there. Then when you want new skis, birthday presents, or other non-essential items, you can take the money out of there.
There is an important distinction here. You will need to fix your auto/house, but you do not “need” to spend $1000 on a birthday present. Birthday presents are living expenses. Car expenses are required “planned expenses” even if you don’t know when your car is going to break, fact of life, it’s going to break at some point.
January 31st, 2006 at 12:04 pm
Examples for me are mostly subscription-type services such as pre-paying my internet hosting fees (~$200) and magazines. A big one, though is quarterly estimated taxes. I suppose I can accrue those amounts for two months, then pay it out in the third month. When I get through my planned expenses tonight I’ll let you know if there are any other big ones.
January 31st, 2006 at 12:23 pm
I can see how subscription or non-monthly expenses could be a burden if too many are aquired. I will create a post and an excel document for keeping track of these things. Mine have been so small that it hasn’t been an issue, but I have an idea on how to handle this.
I am concerned though that you are mixing your business and personal accounts. If you are running a sole propietership you should at least have a seperate business checking account that pays for your business expenses and holds your tax money in it.
Then you just pay yourself an amount you are allowed to spend to your planned expense account. Treat this just like direct depost or a pay check.
January 31st, 2006 at 2:25 pm
I have recently set up a Flex Benefit plan to save the income tax on our medical spending. The way it works is that I have to pay the copayments upfront, submit the Exp of Benefits docs to the Flex account service, and then I get a reimbursement check out of my account. This leads to more than a little complication in the budget spreadsheet. I fell like I may have to take all medical expenses out of the Planned chk account and just treat them as Living Expenses. Any ideas on that type of scenario?
BTW, thanks for the hard work in documenting this.
January 31st, 2006 at 3:41 pm
Hi Paul,
As long as you have a small cushion, say $200, to cover copayments in your planned expense, I would just use that for the medical payments. Anytime I have money I’m spending that I will get returned for, I check the leftover balance in my planned account, and just use that. If I don’t have money to cover it in my planned expenses account, then I transfer some out of my savings and still use the planned expenses account.
A lot of flex spending accounts will give you a checkbook and a debit card. If you have that option, I would use that to eliminate any moving around.
February 1st, 2006 at 7:49 am
Turns out my estimated tax payment was a one-off, so it’s not relevant. Magazine subscriptions and most donations are cheap enough that they should be covered with Living Expenses.
Here are some of my real and significant yearly expenses. I won’t give the amounts for privacy reasons, but I will say that each is between $100 and $1,500 and is billed/paid yearly:
* Car insurance
* Home insurance
* Security system monitoring
* Internet services
* some donations
February 1st, 2006 at 9:34 am
Awesome, thanks!
February 1st, 2006 at 4:39 pm
I’m a freelancer with a highly irregular income. Not only that, but because of several family illnesses, my income has become very marginal as well as irregular.
How can I use this plan when I don’t have a “paycheque” coming in, and when some months, the income doesn’t cover all the regular bills? This means we have to trade off paying the hydro and buying groceries, for example.
Maybe we could set up two tiers of planned expenses? The first tier is 50% of each regular/minimum payment…
February 1st, 2006 at 9:45 pm
I have been tracking my expenses in MS-Money 98
for a long time now and tried using the budgeting side but it wasn’t having an effect on my partner. ( Too complicated ). I set up a 2nd classifaction called Planned of Regular / Discretionary, and then worked out by looking back at my expenses for three months that my regular bills came to about 73% of the income.
I then said to my partner that there was $XXX.XX dollars left for the week that could be spent on discretionary items. That was quite understandable.
I still have a catergory budgets, but if we can get our discretionary budget under control. ( ie not spend more than we have ) it will be a very good year. Thanks for the stackbacks system
February 6th, 2006 at 8:35 am
Silvia,
Freelance work, similar to being a salesman, it is hard to predict when money will come in. You don’t get regular paychecks.
I worked on a sales floor for years, and the BEST plan I saw worked something like this:
Setup your minimum living expenses. Save 3-months of living expenses. This is done when you get that great job that pays out. Put it in your account, and leave it there. That first account acts like a bucket. Once you fill the bucket up to a certain amount, it will start to spill-over. Live off the spill-over amount. That way, when work is slow, you have the bucket to fall back on.
For example, for me, I need roughly $6,000 to live off of for 3 months, and get all my bills paid. My bucket is therefor $6,000. Once I get $6,000 saved up, I start living on what comes out OVER that amount.
Applying this to the StackBack’s system, it is almost the system in reverse. Since you cannot predict your monthly income, you must predict your monthly spending. You know your fixed expenses, now, give yourself a budget for your living expenses. Once you have your bucket filled up, simply pay out your (fixed) allowance to yourself every month (bi-week, whatever), and stay within it. If you have extra at the end of your allowance pay-out date, put it back into your bucket.
I know dozens of people that do this, who work in sales, and they know that they will have 1-2 month slumps every now and again.
Hope that helps!
February 6th, 2006 at 8:39 am
Silvia,
One other comment. I know too that the BEST salesman I worked with were that way, because of financial planning like this. Unlike other salesman, they didn’t have to worry about making a sale so they could buy groceries that day. This did wonders to chance their mental state-of-mind, and they stayed relaxed, and did a VERY good job at sales.
I imagine there will be similarities with free-lance work. If you do not have to worry about getting that job in order to buy food/gas for the next week, then you can relax, take it easy, and excel.
February 6th, 2006 at 3:34 pm
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February 9th, 2006 at 1:17 am
How do you set up a fair budget for planned income when one’s income varies greatly. My net pay range could vary by as large as $400. And to me and my wife, $400 is a lot of money and it can go a long way in our household.