Setting up a household budget

Once the crazy whirlwind of the emergency fund month is over, and you and your spouse are starting to get excited about the reality of becoming debt free and financially secure, the next step to take is setting up a household budget. This step was extremely difficult for me to get started on for so many reasons. First, I really did not want to face how much my daily and monthly expenses were costing me because it was only going to make me feel depressed about how much debt I was really in, and guilty about how much money I blow without realizing it. Second, I am horrible at saying no to people, especially myself. I was looking at the budget as a kind of diet that I would never stick to. I really did not want to give up the things I enjoyed doing, and I was afraid once I got real with myself, I would have to make some hard choices. And third, it just seemed really complicated and a lot of work. But honestly, once John and I got started, it turned out to be a lot of fun and very surprising about how much money we were actually saving!! By the end of the first month on our budget, John and I both looked at each other stunned as if a magician had placed money in our bank account...we had no idea how we were able to come up with that much surplus cash with very little extra effort. Keep reading if you want to know how we did it!

First of all, the way we did our budget is an interpretation of what Dave teaches, so it might work for you, or you might want to set it up more like how he explains it. Here is a link to his budgeting advice: http://www.daveramsey.com/articles/article/articleId/the-truth-about-budgeting/category/lifeandmoney_investing/

The basic principles of budgeting that Dave teaches are to:

1) Make a plan on paper for every dollar before you get it. That way you are in control of your money and none of those handsome dollar bills are running away before you have a chance to tell them what to do!

2) Budget your daily, weekly, monthly, and even inconsistent expenses every month. That means, not only should your rent/mortgage, electricity, and debt payments be budgeted, but birthday gifts, groceries, school supplies, even Christmas!! Yes, budget for Christmas every month! That way, when your car needs its oil changed in any given month, you have been putting aside $10 every month so that after three months, you have your $30 to go get it done...no need to stress about having that expense pop up!

3) Adjust your budget as needed and have regular meetings with your spouse about how it is working and what needs to be changed. In some households where one spouse may be in charge of allocating the funds, and the other spouse is in charge of spending them, it may not always match up. I know that if John only budgeted $10 a month for diapers, there would be a problem!! But having the month planned out ahead of time is great because there are no arguments later when one spouse goes and spends money on something that was not agreed upon.

4) This one is my favorite...budget for "blow" money. Give each member in the household a fixed amount every month that they are not accountable for, just to spend on whatever they want. I know that when John and I were doing this, he spent his blow money on a video game subscription and Rockstar energy drinks, and I preferred to spend mine on lunches with friends and pedicures. I loved having this money because I no longer had to feel guilty for or justify my indulgent spending!

5) Use cash. The only thing that should be coming out of your bank account electronically is direct payments to your utilities and bills. Make as many of your daily and monthly expenses in cash, so that your account is easier to monitor, you are less likely to spend as much, and you are better able to stay on budget. I know that I am much less likely to go over my grocery budget if I take $50 in cash rather than just shop and use my debit card.

Now here is where Dave and I differ:

Because I had a variable income (working FOUR part-time jobs) it was practically impossible for us to plan out our month before we knew our income, so we did our budget a little backward. At the beginning of the month I would go to the bank and pull out enough cash to satisfy our months worth of groceries, fuel, blow money, entertainment money, and we had an "other" category for such incidentals that changed every month. Then I would look at our payment schedule, and anything that was going to be due before the next payday, I would leave that amount in the account, as well as a $200 buffer. We always had a minimum of $200 in our account so that we would never overdraw. If you need to use your emergency fund to get this process started, it would be worth it. I always liked working a month ahead because then we never had any surprises! So here is what our budget looked like:

Bank balance: $2,400
-$250 cash for groceries
-$250 cash for fuel
-$100 cash for blow money
-$50 cash for entertainment
-$100 cash for other expenses

So after withdrawing all of my cash monthly expenses, I still have $1650 left in my account. Now I have to look ahead to what is coming due before the next payday. John got paid every Friday, so I only had to account for the next week's worth of electronic payments.

Bank balance $1,650
-$850 rent
-$125 car insurance
-$35 pet insurance
-$16 for newspaper subscription

Later in the month (after John gets his next paycheck) there will be more bills due, but his deposit will more than cover them. I only do this process at the beginning of every month because I take whatever is leftover and deposit it into SAVINGS!!!

Bank balance of $624
-$200 buffer

I deposit $424 into our savings account!! Now each paycheck this month will pay that week's bills and then have some leftover, and at the beginning of the next month, I do this all over again. I said at the beginning that John and I were shocked by how much was leftover that first month!!

You could do this same process if you got paid once a month or bi-weekly. The key is to NOT use your debit card so that you never have to wonder how much you have in your account. You planned at the beginning of the month what your electronic payments were going to be, and everything else was pulled out in cash!

Here is another area that I branched out on my own and did not Follow Dave's plan to the letter. Instead of keeping my whole monthly budget in cash with me, I used a jar system in some super secret location. I would put all of the month's cash budget in here at the beginning of the month and pull out what I needed when I needed it. Since I didn't carry it with me, I had an "oops" jar too, just in case I needed to stop for something on my way home and didn't have the cash on me. I normally didn't let that happen, but sometimes I would put something on my debit card and then pull it out of the corresponding jar at home and put it in the "oops" jar to be put back in the next month.

Our growing savings account ended up just being the catch-all for any expense that popped up. Getting tires replaced, taking Chewy to the vet, getting some new glasses, whatever. As I said, Dave advises that you plan for these things and make a separate collection, but I knew that wouldn't work for us, and I felt that we had enough self discipline to only use it for necessities. I DID however make separate collections for our trip to Disneyland that fall though! We paid cash for our plane ticket, hotel, Disneyland passes, and spending money. That was the first time in my whole life that I saved up for a vacation!!

I loved this new cash budget!! It kept me on track because I had a visual to see just how much I was spending, and I had a lot of fun seeing how far I could make our money go! It also gave me the opportunity to start using the idea of "opportunity cost" that my lovely high school economics teacher taught me. Since John and I only allotted ourselves $50 every month for entertainment, if we wanted to go out to a movie or bowling or drinks with friends, we either had to use that money or our blow money, or once we even took from our grocery budget!! It made us start really evaluating just how much sacrifice we were making to go out. If we blew our whole budget in one night, then we wouldn't be able to go out again until next month. I honestly never felt like I was depriving myself using this system, I just remember asking myself, is going bowling tonight with these friends worth blowing my whole entertainment budget, or would I rather wait and do something else later on? I would have never asked myself that question before making a budget. And I never had to say no because I was "broke". I loved having that freedom!! I just said, "nah, I don't think I want to do that." I loved not being broke all the time!!!

There is a lot more to this whole budgeting thing, and honestly, Dave Ramsey makes it sound a lot more fun than I do. I would highly advise that if you need more guidance in this area, to really commit to following his program and seeing how much it can change your life. If you have any specific questions on what we did, let me know and I would LOVE to share!! My next blog will be specifically setting up a budget with a variable income, because that posed quite the challenge for me, but I came up with a great idea that made it work!!

Sarah