In the last few days we have reviewed how to determine your budgetable income to be able to plug it into your budget. As you have seen, there are so many different scenarios for this, but I hope that you were able to find your situation in my scenarios and develope a plan that will work for your income. Today we are looking at how to determine your expenses. In your budget, you are going to list all of your bills and expenses and the following blog is going to help you to do that. God bless.
Have you ever felt like trying to get ahead in your finances is kind of like trying to blow up a balloon with a giant hole? The more energy, time, and air you pour into that balloon, the more frustrated you become because it just won’t get any bigger. And even worse, the second you take a break, it completely deflates and you have nothing to show for your efforts. It all just feels like a mystery because you never know where the air is going. And all of this frustration is simply because you have never taken the time to identify the holes.Today we begin the adventure of finding out exactly where your money is going. To me, budgeting is all about being purposeful with your money so that you don’t just continue to throw all of your energy and money to the wind.Your “hole finding” mission for today is to identify all of your bills. I want you to make a list of every place that your money is obligated to go. If you have already made your binder, or organized your filing, then this step is going to be easy for you. Your bills are going to be specific to your life, but here is a list of some general categories:
Mortgage/Rent
Savings
Giving
Insurance
Electricity
Gas
Water/Sewage
Telephone
Internet
Cable TV
Car payment
Car Insurance
Credit Card Payment
School loans
There are also other categories which have more flexibility, but actually tend to steal more air and I want you to make a list for these categories as well. Categories like:
Groceries
Gasoline
Entertainment
Baby Expenses (if you have one)
Clothing
Gifts
Try to be realistic and specific about what you spend your money on. If you go get your hair done every month then you need a hair category, etc… Try to be as specific as you can. This is where your money is going and it is imperative to identify every area. Don’t worry about all of the “holes” in your balloon right now. A lot of that is just life and what it costs to live, but as we go along in this budgeting process, you will realize that by not being purposeful with your money, you have allowed some of those holes to sabotage your dreams. This is just the beginning, so hang in there with me, because I am confident that this plan is going to finally get your balloon off of the ground.
Bills That Are Fixed
The next step on your journey to establishing a budget is to determine what you are averaging in spending in each of the categories that we established yesterday. We are also going to determine each bill’s due date, as that is critical to knowing which paycheck each bill must come out of and it’s placement in the budget. So get out your list and let’s start with your Mortgage/Rent. It will be easy to determine because it is a fixed amount each month. Write down the amount and the date that it is due by. I want you to do this for every bill that is fixed (does not fluctuate from month to month).
If you do not have paper statements, you can check online for your bills. Most companies now allow you to access your account online and will let you see your bills for the last few months. If you do not have online access to your bill, you can also check your bank statement (or check book register) to track your spending in a category. If all this fails, you can always call the company and they will definitely be able to give you your bill totals for the last few months.
Bills That Fluctuate
So what about bills that change from month to month? One of the most confusing issues that people have with setting a budget is, “How do I know what to budget when my bills vary so much?” In the winter your gas bill will typically be high and then drop to nothing in the summer (unless all of your appliances run on gas). It can be a challenge to know what to budget when your bill can fluctuate by more than $200! So here is what has worked for my household, and some ideas that have helped others with their budgets as well.
This is where it is really helpful to have the last 12 months of statements or be able to access them either online or by a phone call to the company. The first step is to take the last 12 bill totals and add them together. Divide the total of this by 12 and you will have your monthly average. However, it is always better to budget too much than too little and in the months where your bill reaches $150, you will struggle if your average is only $70 and that is all you have budgeted.
There are several ways to compensate for this. First of all, you can budget your bill at the top side of your bill (at $150) and then in the low months (when it is only $30) just put the difference into your savings plan. This is a great plan if you have lots of flexibility in your budget (make a lot more money than your actual bills). However, the average person does not have this flexibility, so this plan can be very difficult for them because that is an extra $120 that they are unnecessarily putting aside each month. Your bill will only be that high one or two times a year, and many people need that money to live the rest of the year.
A second plan is to budget your bill half way between your average bill and your highest bill of the year. That way the majority of your bills will be covered by your budget, but maybe two bills a year you will need to draw from your savings to make up the difference. The third plan is to budget your bill at the average bill and start a savings plan just for that utility. Each low month of the year (months with the lowest bill), you would take the overage in your budget (the difference between what you budgeted and the actual bill) and put it into a savings account so that money is there when the bill is in the high months. This third plan requires a lot of discipline to not spend the extra money when your bill is low, but it is definitely do-able. I will discuss savings plans in detail later, but I currently have five savings accounts open which I use both to manage our money and to save for our dreams.
Another idea for managing your variable bills is to take out the variation. Many utility companies offer fixed rate programs, in which they take the average of your last 12 months of bills and that then becomes your fixed bill total. They do have to adjust it each year for rises in cost of gas, electricity, etc and for your actual usage, but they should only adjust it once a year. Many companies will also refund you the difference if your actual usage is less than what they have charged you over the course of the year.
I have used all of these plans over the years, but I have found that the easiest is to allow the utility company to average my bill for me. If that is not available, I now do a combination of the second and third plan. My budgeted amount is between the high bill and the average total and when the bill is at its lowest point I will put that money in savings for the two months when that bill is high. Most of the year I have enough to cover the bill and I don’t constantly have to be micro-managing the money. There is also the factor that when my electricity bill is at its highest in the summer, my gas bill is often very low, so I can use the surplus from my gas to pay my electricity.
Regardless of what plan you choose to use to set your budget for your utilities, it is very important to have a plan. Try to think through your personality, the flexibility level in your finances, and what is available to you through your bill company. These factors will help you determine which plan will best fit you and your family’s needs. Having a plan in place for your utilities means that you will no longer have to worry about your bill totals from month to month. Instead, you will be free to sit back and enjoy the weather, no matter what season you are in.