Thursday, December 29, 2011

Creating a Spreadsheet

Now that we’ve got a budget planned out, it’s time to create a spreadsheet to make it easy to maintain on a regular basis. The new year is a perfect time to begin a budget. We hope to have you in a position to start your budget by January 15, the time that the first transactions for the year need to entered into a spreadsheet.

The first decision to make is what spreadsheet software to use. There are many different programs varying widely in price that will work just fine. If you already own a copy of Microsoft Excel, we recommend that you use it. We currently use Excel 2007. However, essentially any version will do. If you already own another spreadsheet software package, it will most likely be acceptable since a budget spreadsheet does not require any fancy or complex processing. If you don’t already have spreadsheet software, we recommend you download the free open source (OOo) suite of productivity software ( One of the products in this suite is Calc, a spreadsheet program. It supports many of the same features included in Microsoft Excel and should work fine for budgeting. For our current purposes, we will be using OOo Calc just to show how a free product is more than capable of handling our budgetary needs. We are using OOo version 3.3.0. Its native file format's extension is “ods”; however, files can also be saved in Excel format (“xls”) should you ever decide to switch to Microsoft’s product.

There are a number of different ways a budget spreadsheet could be laid out, but we like the layout shown below.

It is not our mission to give instructions on how to use spreadsheet software. There are many existing books and Web sites that do a great job of that. Our mission is to show you how to set up an efficient budget spreadsheet. With that in mind, please note some of the features of the sheet above. Cell A1 shows the current year and the budget number for that year. If you follow our recommendation and update your budget twice a month, then you will be generating 24 sheets over the course of a year. The first budget sheet for a new year will be generated mid-January. The second one will be generated at the end of January, and the final one for the year at the end of December. Cell A1 should read 2012-02 for the second budget of the year. When the final budget sheet for the year is generated, cell A1 should read 2012-24.

Cells A2 through C3 show header information. Column A is formatted as Text and will be used to enter Transaction Numbers, thus its heading. A transaction number can be a check number, an online bill pay sequence number, or text like Deposit, Transfer, Debit, etc. Column B is formatted as Date (MMM DD) and will be used to enter the transaction date. The M-D-12 indicates that all the dates are months and days in the year 2012. Column C is formatted as Text and will be used for entering where the transactions took place, such as Best Buy, JCPenney, or

Note that the date for the Starting Balance is Jan 01. At the bottom of the sheet in row 80 you see that the Ending Balance is for Jan 15. Once this budget sheet is complete and preparation is being made for the next semimonthly budget sheet, the Starting Balance date will be changed to Jan 15 and the Ending Balance date will be changed to Jan 31. We will discuss how to determine your Starting Balance for each budget category in the next post, as well as how to fill in the Semimonthly Allowance values in row 79.

Columns D through U contain the headers for the budget categories determined in previous posts. Below the appropriate headers will go the monetary amounts of each transaction. Therefore, rows 3 through 80 for columns D through U are formatted as Currency. Row 80 for each of these columns sum up all the amounts in rows 3 through 79. Thus this sum, for each column, represents the Starting Balance minus all the transaction amounts plus the Semimonthly Allowance for that column, resulting in an Ending Balance for the budget period.

Row 82 shows the overall balance for your checking account in column U (not shown in figure). This is simply a sum of all the Ending Balances from columns D through U. There is nothing magical about the number of rows that are allotted for transactions. We use a budget sheet with a total of 82 rows (includes the Total row). Over time we determined that it was rare for us to have so many transactions during a budget period as to exceed this number of rows. Also, it was about the maximum number of rows that would fit on a single landscape 8.5”x11” sheet of paper and still have text large enough to read. If you find that you need larger text, you can either use fewer rows or plan on printing the spreadsheet across two sheets of paper.

Notice that the headers are various colors to separate them. This is nice if you are using a color printer to create hardcopies of the budget sheets. If you use a black and white printer, then this is unnecessary.

Please download the blank budget spreadsheet using the links below so you can see the entire sheet on your computer: format (.ods): Spreadsheet Blank.ods

Excel format (.xls): Spreadsheet Blank.xls

In the next post we’ll discuss how to initialize the blank sheet with Starting Balances and Semimonthly Allowances.

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Sunday, December 4, 2011

Adjusting Expenditures Part 2

We now continue with adjusting expenditures in the remaining budget categories.

This category may be difficult to reduce. You really need most of the types of insurance mentioned before in order to avoid debilitating debt should tragedy strike. Even so, with diligence some cuts should be possible. For instance, you might want to cut back on the amount of life insurance you have on family members. Some life and health policies allow discounted rates for people in good health. By exercising more and eating better, you might be able to qualify for these discounts. As a “side” benefit, you’ll feel better, also. By shopping around, you may find another insurance company that is cheaper than the one you currently use. A combination of these suggestions could get the cost of insurance down from $400 to $350 per month.

If at all possible, you don’t want to reduce your allotment of money for paying off old debts. Instead, you want to increase it to pay them off faster. For now, just leave the amount at $200 per month.

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Whether you like it or not, you’re going to have to reduce the amount of money you spend on yourselves and your children. To become financially secure, such sacrifices are needed. Try cutting your monthly expenditures on each person in half; from $200 per person per month to $100. No, you won’t be able to buy new clothes as frequently or go to as many movies, but in the end you’ll be better off. Perhaps the family can stay at home and play games rather than going to a movie or a concert. Be creative, and cut that spending.

Since this category is for unaccounted for and unexpected expenditures, it will be difficult to know how much the allocation for this category can be cut. So, just leave it at $50 per month.

Credit Cards
If there is any category not to cut, it is this one. Most likely, your credit card debt is costing you more in interest than any other debts you have. Why pay all that money in interest when it could be used for buying things to better your family. You really want to pay your credit cards off as soon as possible. But, given there are other things you also need money for, there is only so much you can do. So, for now, leave the allocation for this budget category at $500 per month.

So, how did we do? With these reductions in your budget categories, how much money will you be able to save each month? The table below shows the original budget alongside the new numbers.

Wow! Can you believe that we were able to cut your monthly budget by over $1000 per month? With those cuts, you can now begin to save almost $300 per month rather than going further into debt to the tune of almost $800 per month. That is tremendous. And to make all these cuts more palatable, let’s look at how your finances will look in five years after paying off your credit cards and other debts (except your mortgage), assuming your income remains constant.

Again, Wow! Once you pay off your debts, you will be able to start saving almost $1000 per month. What would you do with an extra $12,000 each year? You’ll probably want to up your mortgage payment to get it paid off faster. You’ll also probably want to increase the amount of personal money you have available as a reward for a debt reduction job well done. Just don’t go overboard with these increased allotments. You don’t want to get back in the same financial condition you just worked so hard to get out of.

Next, we will discuss how to set up a spreadsheet for easily handling your semimonthly budget.

Monday, November 28, 2011

Adjusting Expenditures

In the last post it looked like things were pretty bad. Living at the standard we would like was going to put us further in debt to the tune of over $9,000 per year. NOT GOOD! Our goal is to pay off debts while still putting money into savings. This may seem like an impossible task, but it really isn’t. Yes, you may have to make sacrifices you don’t really want to make, but if that is what is needed, plan to do it. You may find that it is not as bad as you might think. So, let’s put on our thinking caps and tackle each budget category in turn.

If need be, the charity budget could be reduced to zero without having to change your lifestyle at all. However, most people we know want to support causes they believe in if at all possible. Therefore, let’s hold off on reducing the money in this category. If we find out later that our budget will only work by reducing charitable giving, then we’ll make an adjustment.

While it is nice to be able to buy our friends and family nice gifts at special occasions, I believe those close to us will understand if we cannot do this while we are trying to get our family finances in order. There are a number of things you can do to reduce expenditures for gifts. You might try making gifts yourself rather than buying them. Or you might give part of your charity money to an organization your gift recipient likes and then give them a card saying that you have made a donation in their honor. At Christmas, you might want to see if your family is willing to draw names so each family member only buys for one other family member rather than everybody. We have personally agreed in our family to only buy for children, thus eliminating the cost of buying for adult family members. I’m sure you can think of other creative ways to reduce the cost of gift giving. We should be able to cut the money in this category in half; from $80 to $40 per month.

You really don’t want to decrease payments towards your house. And even if you did, it may not be possible according to the terms of your contract. If at all possible, you want to increase payments towards the mortgage so as to save money on interest. However, as we stated before, don’t increase this payment until you have totally paid off other higher interest loans. Of course, if you are holding an older mortgage, it may be worthwhile refinancing your house if you can get a new loan with a significantly reduced interest rate. We have heard that after rolling in the closing costs for the new mortgage, the new interest rate needs to be about 2% less than your existing rate for the switchover to save you money. However, keep your eyes open. Sometimes you can find loans for refinancing that have very low or nonexistent closing costs. For the purposes of this exercise, however, let’s assume the mortgage payment needs to stay at $500 per month.

House Upkeep
There are some upkeep items, such as essential repairs, that simply cannot be eliminated from this category. However, some things can at least be delayed. For instance, you can live with that scuffed up wall a bit longer, thus saving the cost of painting. Those spots on the carpet can be covered with a rug rather than paying the cost of professional cleaning or replacing the carpet outright. We may not be able to reduce the budgeted amount for this category much, but it can be reduced some. Let’s lower the amount from $100 to $75 per month.

Home Decorations
Since this category is a nicety rather than a necessity, it can be eliminated altogether. Sure, your home may not look as nice as the Jones’ house down the street, but your finances will look a lot nicer. Just so you can feel like some minor improvements can be made, we’ll not totally zero out this category, but we will greatly reduce it. From $50 to $10 per month.

Some of these costs are not adjustable, such as garbage collection and sewage. Usually these costs are a set dollar amount per month. However, other things such as water, electricity, and gas, where you pay based on usage, are more under your control. There are several things you can do to reduce usage. You can increase the temperature in your home in the summer and decrease the temperature in the winter. Try using fans in the summer and blankets in the winter to compensate. You can also close off vents in areas of your house that are used infrequently. Perhaps your hot water heater could use an insulating wrap. Perhaps you can reduce the amount of water used on your lawn by targeting problem areas while cutting back in other areas. Maybe you can bathe less frequently and wear your clothes more before washing them. There are a lot of things that can be done to cut the cost of utilities. Surely with all these options we can reduce our utility costs from $250 to $200 per month.

In reality, we could get rid of our TV service, all our phones, and our Internet service and still be able to survive. It might be difficult, but not impossible unless your work depends on these services. So, not to be too harsh about this, let’s look at ways to reduce these costs rather than eliminate them altogether. Many people who use cell phones have eliminated their land line phone. That’s one way. Also, if your family is using smart phones, you might want to drop back to a regular phone to save the cost of data services. You might want to drop back to a lower tiered plan on your TV service. Yeah, you might have to give up a few stations you like, but why pay for 100 extra channels just to get a few that you watch if it’s going to cause a family financial crisis. Also, you might change to a lower speed Internet service to save a few bucks. Before making any of these changes, be sure to see if your contracts require you to pay a penalty. If so, see if the company providing the services will work with you after explaining your financial situation. If it’s going to end up costing you more to reduce your services, then there is no need to do so. You should be able to get your $400 per month budget down to $200 per month without too much pain, even if your teenagers may disagree.

If you are frugal, you can get by with a lot less money for food than you believe you can. It should be possible for you to reduce the money in this category from $600 to $450 per month, which is what we discussed before. This amount allows for $5 per meal for the entire family and three meals per day. If you eat cereal for breakfast and sandwiches for lunch, these meals can come in under the $5 amount. This would allow for more expensive evening meals. Of course, you can mix and match any way that best suits your family’s lifestyle. If you are really frugal, you might even find that you can eat out occasionally. Some things you can do to reduce food expenses is to look for sales and stock up when really good prices are available. Although the initial cost is a bit high, you might want to invest in a vacuum sealer. This allows you to purchase large quantities of meat when on sale and then seal it so it lasts longer in the refrigerator or freezer. Also, you might want to take lessons from extreme couponing people. We have seen people on TV who are able to buy hundreds of dollars of food for just a few bucks. It’s still a bit of a mystery to us, but it’s apparently possible. Of course, you have to be willing to eat what you can get cheaply via the coupons, but it should be well worth the effort.

Since this is such an unpredictable category, you should be hesitant to reduce the amount budgeted for it. So, just leave it at $200 per month.

Transportation expenses may be hard to reduce depending on your primary mode of transportation. If you use public transportation frequently, it may be difficult to reduce these costs. However, if you drive your own vehicle, you might see if you can carpool several days a week to reduce expenses. If this is not feasible, perhaps you and your spouse can team up, given that it’s not too far out the way to do so. If your family takes weekend trips frequently, you might try taking shorter trips or eliminating some of them. With some of these changes, you should be able to reduce transportation costs from $600 to $500 per month.

In the next post, we'll make adjustments to the remaining categories and take a look at the new numbers to see how we have done.

Sunday, November 13, 2011

Allocating Income Part 2

This is a continuation of our Allocating Income post from about a week ago. Here we budget money for the remaining categories.

Medical budgeting is difficult simply because one major problem can set you back a lot of money. As with other categories, this one can only be predicted based on past expenditures. However, if you know that a large unusual medical expense is in your immediate future, then be sure to account for it in your budget for the year. Let’s allot $200 per month for now and modify as needed later.

Transportation expenses can vary greatly depending on how many cars your family owns and whether or not you still owe money on them. Also affecting these costs are how high your taxes are in your state and how much gas mileage your vehicles get. If you live in the big city and use public transportation, the frequency of use and the distances you must travel will determine much of the amount needed for this category. As we said before, be sure to include money for plane, train, and rental car expenses if you travel away from home frequently. Based on our past experiences, $600 per month is probably a good average number to use. If you like to buy all drivers in your family new cars every few years, then this number won’t even scratch the surface.

This category covers every type of insurance you have except for homeowners, which is included in the mortgage category. These are things like homeowners, car, health, life, long-term care, and pet insurance. There are so many types of insurance to help protect you from loss that the cost can quickly get out of hand. Many of the premiums will be paid annually, semi-annually, or quarterly. For each, a calculation must be made to determine what the cost is on a monthly basis. For instance, if you pay $1000 per year for homeowners insurance, that would be $1000/12 or $83.33 per month. One of the most expensive insurance costs is auto insurance for a teenage driver. So, we’re going to estimate that total monthly insurance expenses are about $400 per month. If you are fortunate enough to have medical, dental, and perhaps even life insurance through your place of employment, then some of your insurance costs may be taken out on your paycheck. In this case, do not include these costs in your budget as you will only be adding your net income to the budget. Net income is your total income minus taxes and any deductions for insurance, union dues, etc.

Hopefully you do not have any debts apart from your home, cars, and maybe credit cards (which are all covered in other categories). If you do not, this category can be ignored. But since we frequently hear about young people having a lot of student loans debt, let’s include it for this exercise. Suppose you have $10,000 in debt that needs to be paid back with 4% interest. Further suppose you would like to pay this off over the next five years. To do so will require you to pay $184 per month. Let’s round this to $200 per month.

If you are married or have a partner, we think it best to divide this category into at least two, one for each partner. Let’s say your names are Jack and Jill. Also, if you have children, we recommend another category named—you guessed it—Children. Again, the money allotted to these categories is for the discretionary spending of the designated person. In the case of children, the parents will want to control the spending in the Children’s category. As these children get older, some of their designated money may be turned over to them, allowing them to make their own spending decisions. Assuming a family of four and allowing for $200 per person per month, that comes to $800 per month total.

This budget category is for those expenditures that simply don’t fall neatly into any of the other categories. For instance, a newspaper subscription. Hopefully there will not be too many of these type of costs, but you might be surprised how many of these can crop up in a month’s time. Let’s initially allot $50 per month.

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Credit Cards
If you have been frugal and paid off your credit cards each month in full, then you do not need to allot any money to this category. As we mentioned before, whenever a new purchase is made with a credit card, you will simply transfer the money from the appropriate category to the credit card category. Then, at the end of the month, you will have enough money set aside to pay your credit card in full. However, if you are starting out with credit card debt, then you really need to begin allocating money to this column to pay off those debts. Let’s suppose that you owe the credit card companies $20,000 and the average interest rate you are paying is 14%. If you want to pay off these credit cards over the next five years, you will need to make payments totaling $465 per month. Let’s make the decision to allocate $500 per month and pay off the debt in 4.5 years.

The amount of money going into this category is simply your total monthly income minus the total amount allotted to all the other budget categories. Your goal, however, is to maximize this number as much as possible. If after allotting money to the other categories you find that you are putting a negative amount of money in this category, then something has to change. You will need to modify your lifestyle to live with less so as to reduce the amount being spent. As you pay off your debts, you will find that you can resume some of your suspended lifestyle.

Alright, we now have our initial money allocations for our sample budget. Let’s look at a summary.

Uh-oh. This is not good. Using the initial budget allocations results in us going into the hole almost $800 per month, which is over $9,000 per year. Clearly, some major adjustments need to be made. We’ll do just that in the next post.

Saturday, November 5, 2011

Allocating Income

We are now going to discuss what is probably the most difficult part of setting up a budget: allocating your income to the budget categories you have determined are right for your family. As you may recall, we suggested the following categories (with credit cards added):

Charity, Gifts, Mortgage, House Upkeep, Home Decorations, Utilities, Communications, Food, Medical, Transportation, Insurance, Debts, Personal, Miscellaneous, Credit Cards, and Savings

What needs to be done now is to decide how much money you plan to spend each month in each of these categories. However, as we have said before, we do not recommend entering expenditures on your budget spreadsheet every month. That is too infrequent. We believe that twice a month works well. It keeps each spreadsheet at a reasonable size, and it is frequent enough to make course corrections should you find yourself overspending in some categories. So, once the monthly allocations are made, these numbers can be divided in half to determine the semi-monthly budget numbers.

For the remainder of this chapter we will allocate money to the above categories based on a made-up household income. Statistics show that the median household income in the US is currently about $50,000 after taxes. So, that is the number we will use for our sample budget. Since it is rare that both spouses have equal incomes, we will assume one spouse clears $30,000 and the other $20,000 just to make things interesting.

What we will do first is make a monthly allocation to each of the budget categories. This is best done by going through past expenses and estimating how much was being spent in these categories, then making initial allocations based on those numbers. If we find that our income is sufficient to support those level of expenditures while still saving a significant amount, then we are golden. If not, then choices will have to be made about where to cut.

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If you work a job where the hours are inconsistent, thus causing your income to go up and down over the course of a year, then budgeting will be more difficult. In this case, you must estimate what your total annual income, after taxes, will be and go with that amount. You should estimate on the low side. Then, if your income is actually higher, you will have more money to put in savings. At any rate, let’s still assume that your total estimated household income is $50,000 and get started.

If you prefer to actually base your charitable contributions on a percentage of your income and you have a job where your income fluctuates a lot, then you may not want to budget a monthly amount for this category. Rather, when you receive a paycheck, you can simply allot money to this item based on how large the paycheck is. This can make it more difficult estimating how to spread your money across the other categories, so we recommend against this if at all possible. Let’s suppose your past giving was about 5% of your income. At a $50,000 income level, that calculates to $2,500 per year or about $210 per month. Let’s start with that amount.

Most people like to give gifts to friends and family at special occasions such as birthdays, Christmas, graduations, weddings, or anniversaries. Many people don’t like to be bound by a budget when giving gifts because they want to be able to purchase whatever is meaningful at the time even if it’s a bit expensive. However, if you’re going to manage your money, spending in this category needs to be controlled just as much as in the others. Let’s set an initial budget of $80 a month. If you have large families and lots of friends, you may want to up this if you find out you can afford it.

Since you are probably making a monthly payment on your home loan, this one is easy to determine. It’s whatever that monthly payment happens to be. We are assuming that the mortgage payment includes enough money to cover homeowners’ insurance and property taxes. Let’s suppose the minimum amount you can pay on your house is $500 per month. This is the initial amount to allocate for the mortgage category. If you later discover that you are putting more than enough money into savings, you will probably want to increase the amount you pay on your mortgage. This will allow you to pay it off early and save money on interest. Make sure your mortgage contract allows increased payments with no penalties. Also, keep in mind that you will want to pay off higher interest loans and credit cards before increasing your mortgage payment. It makes no sense to make higher payments on a low interest loan when that money could be used to pay down higher rate loans.

House Upkeep
This category is difficult to determine since it is impossible to predict what repairs might be needed in the course of any given month. But an educated guess can be made based on past expenses. Let’s allocate $100 to begin with. Adjustments can be made as needed in the future. If any unexpected repairs costing lots of money are needed, you may have to use money from savings to cover them. This is why it is good to have a healthy amount of money in savings. It will allow you to handle contingencies without putting you deep in the red.

Home Decorations
This category is a nicety rather than a necessity. Money from it goes towards things to beautify your home. Of course, if your income is too low to cover necessities and niceties, then the niceties need to be eliminated first. So, let’s start with $50 per month, then decrease it later if we find that we simply can’t afford this amount.

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Although this is a necessary item, it is also one that can be decreased by making adjustments to your lifestyle. The money allocated to this category needs to cover the total cost of electricity, gas, propane, water, garbage collection, sewage, recycling, and anything else of this nature. Basically, any type of service provided to your home by the city and county where you reside. Of course, monthly bills vary by seasons of the year. It’s much more expensive to heat or cool a home in summer and winter than in spring and fall. So, what is needed is an estimate of the yearly cost of these goods and services, then divide that number by 12 to get a monthly amount. Let’s say this number is about $250 per month.

It seems that just about everybody has a cell phone these days regardless of income. But cell phones make up just a portion of your communications budget. This category also includes land line phones, TV satellite or cable, Internet service, pagers, and anything else that serves a communications need. With all the different services available, this category can require substantial amounts of money. For a family of four, communications costs can easily reach $400 per month. So, let’s use that number.

As we said before, this is the budget category that our family has the toughest time balancing. We all stay pretty busy, so we tend to want to eat out more often than we should. We use restaurant coupons as often as possible as this saves us a lot of money, assuming, of course, the alternative was eating out without a coupon. Even though dining out can be quite expensive, it seems that grocery prices are themselves quite high. We sometimes go into the grocery to get just a few items and suddenly realize that we needed more than we originally thought, and end up spending twice what we expected. Even so, buying and preparing your own meals will, in general, be significantly cheaper than eating out. Randy just recently saw a lady on TV showing meals that can feed a family of four for $5.00. For three meals a day, that is $15 per day or about $450 per month. Most people will want to eat out at least once per week. So, let’s initially allot $600 per month. If you find out you can’t even afford the $5.00 meals three times a day, you may have to plan a lot of PB&J sandwiches and Ramen noodles.

Okay, we are about halfway through the budget categories. In our next post we will cover the remaining categories and see where we stand in relation to monthly income.

Thursday, October 13, 2011

Credit Cards

The use of credit cards is somewhat controversial among financial advisors. Some say it’s best to never use credit cards at all while others say their use is fine. Dave Ramsey, one of my favorite advisors, is opposed to using credit cards because studies have shown that people who use credit cards tend to spend more on unnecessary things than do people who don’t use them. Typically, interest rates on credit cards are high compared to rates for other types of loans such as houses and cars. By running up large debts on credit cards, you can end up spending quite a bit of money just on the interest. So, Mr. Ramsey recommends never using credit cards and, if you are currently in credit card debt, stop using them immediately and begin paying them off.

We personally approach credit cards with the same caution that the Bible recommends for drinking alcohol. Proverbs 23:29-35 says:

Who has woe? Who has sorrow? Who has strife? Who has complaints? Who has needless bruises? Who has bloodshot eyes? Those who linger over wine, who go to sample bowls of mixed wine. Do not gaze at wine when it is red, when it sparkles in the cup, when it goes down smoothly! In the end it bites like a snake and poisons like a viper. Your eyes will see strange sights, and your mind will imagine confusing things. You will be like one sleeping on the high seas, lying on top of the rigging. “They hit me,” you will say, “but I’m not hurt! They beat me, but I don’t feel it! When will I wake up so I can find another drink?” (NIV)

The Bible makes it clear throughout that drinking alcohol is perfectly fine as long as you control its consumption. However, as we see here, if you find that the alcohol is controlling you, then it is time to stop drinking it; cold turkey. We believe the same holds true for credit card usage. If you can control your spending, living within the budget you set for you and your family, then credit cards can actually benefit you. However, if you can’t control yourself, it is indeed time to follow Mr. Ramsey’s advice: cut up the cards now and pay them off as soon as possible.

Some of things we look for in credit cards are: no annual fees, no hidden fees, a 20-25 day grace period for monthly payments, and, most importantly, cash back bonuses. With a card like this, things you purchase will actually be cheaper because you will still pay the same at the store, but the credit card company will give you money back. For instance, we have one credit card that pays us 5% back each month for all gasoline purchases paid at the pump. We have another card that pays us 2% back on everything we purchase. Yet other cards pay us 3% back for purchases made at certain stores. The trick here is that you must pay off ALL your existing credit card debt and then begin to pay off all future credit card charges in FULL each month. By doing so, you will not be paying extra for interest and fees. Rather, the credit card company will pay you a percentage of all your purchases.

Be sure to pay off your credit cards each month ON TIME. If you fail to do so, interest will have to be paid as well as a substantial late fee. Most of the cards we use have a way to set up an automatic “pay-in-full” each month. Once set up, the credit card company will automatically remove your full balance each month from your bank or credit union checking account. If for some reason they are late transferring the money from your account, no late fees or interest are due because it was their responsibility. Of course, you must make sure you have enough money in your checking account to cover the bills when they come due, else you may find yourself facing overdraft fees from your bank and/or fees from the credit card company. Of course, you do not want to set up the automatic draft until you have paid off your existing debts and are ready to live according to your means.

To make sure you have money each month to pay off your credit cards, a budget item entitled “Credit Cards” needs to be added to the items mentioned in the previous post. Then, when a purchase is made with a credit card, the amount of the purchase can be transferred from the appropriate budget category into the Credit Cards category. For instance, suppose you spend $75 at the grocery store using a credit card. You have not actually removed money from your checking account, but you do want to account for the money in the Food category. So, when you next handle your budget, the $75 will be subtracted from the Food category and added to the Credit Cards category. This will let you know that you now have $75 less to spend for Food and, simultaneously, you have set aside $75 for when the credit card bill comes due. If you had used a check or a debit card at the grocery store, you would simply subtract the $75 from the Food category since the charge would have applied directly back to the checking account.

One last thing to keep in mind concerning credit cards. Some places charge a convenience fee when using a credit card. Usually these fees are more than what your cash back bonus pays you. In these cases, it is best not to use a credit card unless its use is truly more convenient and it’s worth the extra fee.

We’ll talk more about credit cards when we get into actually setting up a home budget in a spreadsheet.

Note from Randy: Be sure to check out my new novel. Just click below.
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Monday, October 3, 2011

Expense Categories

When deciding what categories to use when splitting your expenses up for your budget, it’s a good idea to start with some broad ones. Should it turn out that you are lumping too many expenses into any of these categories, those can be divided up later to better refine your budget. Over the 29 years that we have been budgeting, we have modified our categories many times based on spending patterns and life style at the time. For instance, when our son was born, we had to create a category for costs associated with his care. When we finally paid off our mortgage a couple of years ago, we modified our mortgage category. The point here is that you don’t have to get the categories perfect from the get-go. You can hone them to perfection later and then modify them as necessary.

So, where should the money in these budget categories actually reside? We suggest a checking account with a financial institution like a bank or a credit union. While we know some families that like to keep separate checking accounts, we believe our budgeting system works best with just one account. This allows you to total the balances of all the budget categories and see what the current balance of that one checking account should be. Reconciling your money is easy in this case. But if for some reason you really need to have more than one checking account, it can still work. You will just have to decide which budget categories are associated with which checking account.

However you decide to divvy up your money between accounts and budget categories, we can’t over emphasize the trust factor. Total trust in each other is essential. If all parties are not 100% on board with the agreed upon budget, things can go awry quickly.

Here are a few categories that we suggest starting with:

Charity, Gifts, Mortgage, House Upkeep, Home Decorations, Utilities, Communications, Food, Medical, Transportation, Insurance, Debts, Personal, Miscellaneous, and Savings.

The Charity expense category should include any money you donate to charitable organizations such as your place of worship, medical research organizations, etc. Some of you might like to divide this category into two: one for tax deductible donations and another for non-tax deductible donations. This is fine but it might be a bit difficult budgeting between the two if you don’t know in advance how you will be splitting your money between the two. Personally, we just add (ntd), meaning not tax deductible, to the name of organization if it is nondeductible. If you and your spouse like to support different charitable organizations, you might want to split this category into two, one for each spouse. This will help prevent disputes over whose charities are getting the most money.

The Gifts category covers expenses for others. This would normally be for such things as Christmas, birthday, and anniversary gifts, but could also include taking friends out to dinner.

The Mortgage category is for the cost of paying back the loan on your house. If you are renting, then this category is for your rent payment. A mortgage payment usually includes an escrow account for paying your yearly property tax and homeowners insurance. So, when you reach that point in life when you have your house paid off, don’t forget that this category cannot be totally eliminated. You will still need to set aside money for taxes and insurance since you will be paying for these yourself rather than through the mortgage holder.

Originally we had the categories House Upkeep and Home Decorations combined into one category called House. House Upkeep is for anything you pay for that results in maintaining your house and property. This could include such things as plumbing and electrical repairs, lawn care, painting walls, and so on. Home Decorations is for things to make your home look better such as wall hangings, flowers, plants, furniture, and so on. The problem we had with combining the two categories was that Kathy shied away from using any money from the House budget for decorations for fear that the money would be needed down the road for repairs. Of course, simply dividing the category into two did not reduce the chances that repairs would be needed, but it did free Kathy to buy things for our house, knowing that we had both agreed that the amount allocated to the Home Decorations category was available for spending on decorations.

Utilities mainly include the cost of providing power to your house in whatever form that takes. It could be electricity, natural gas, and maybe even wood, oil, and propane. Additionally, it includes the cost of water, sewage, garbage pickup, etc. if your city or county charges for these services.

The Communications category covers the costs of landline phones, cell phones, pagers, TV, and Internet connection. Basically any services that allow you to communicate with the world or the world to communicate with you. We personally have landline phones and Internet service with one company, cell phone service with another company, and TV cable service with a third company. Therefore, we divide the Communications category into two: Phones and TV. However, since many companies now provide all these communications services in one big package, we are suggesting just this one category. But, if you so desire, you can divide it out as we do or in any way that makes sense to you.

Food is our favorite category. We love to eat. For this reason, it is the category we struggle with the most. Oftentimes we find we have spent more than we budgeted. Then we have to try to spend less to compensate. Keep in mind that this category covers both grocery stores and restaurants. Of course it is generally less expensive to buy food and prepare it at home, but that really depends on what you eat and where. For instance, it may be cheaper to eat a burger and fries at a fast food restaurant than to prepare steak at home, especially if you have restaurant coupons. Also, keep in mind that when eating at home you will be increasing the cost of utilities by using the stovetop, oven, and microwave, as well as using hot water for washing dishes. The key is to find the proper balance of eating in and dining out that works for your family.

Now for the dreaded Medical category. This is one category for which we hope your family needs to budget very little money because you are all very healthy. In reality we know that just one major incident can result in a huge bill. Hopefully, you have medical insurance that will cover the majority of your medical bills. This category will need to cover the cost of doctor’s visits, dental work, hospital stays, medicine, etc. Inherently this is a difficult expense category to budget for since there is no way to predict your family’s medical future. So, we suggest reviewing your medical expenses from the past and use them to predict future expenditures. If you don’t have these records, you will have to set a Medical budget that seems to make sense, then refine it as medical expenses occur over the following months.

In our modern society everyone needs a means to get from one place to another, and there are costs associated with doing so. This is what the Transportation category is for. It will need to include car payments, gasoline, vehicle upkeep and repairs, etc. If you are in a situation where you don’t own a vehicle and depend on public transportation, then you need to budget for bus, subway, and taxi fares. Don’t forget the tips! Also, if you don’t have wheels and need to go on a trip, you may need to get a rental car. If you do this on a regular basis, be sure to include money in this category to cover those expenses.

Some people, for the sake of saving money, like to take a risk and have no Insurance. For this reason, some states make certain types of insurance mandatory. For instance, in my state of Alabama, auto liability insurance is mandatory for anyone who drives. There are many kinds of insurance. To eliminate all risks you face in life would cost a bundle of money. There’s life insurance, vehicle insurance, homeowners insurance, medical insurance, dental insurance, vision care insurance, long term care insurance, and even pet insurance. There’s also flood and earthquake riders, personal articles riders, umbrella policies, cancer policies, burial insurance, and on and on. Unless you have a really good income, having all these insurance policies and riders would eat up a significant portion of your take home pay. In this case, decisions have to be made about which policies are the most important. Most people consider medical, homeowners, and vehicle to be essential. But even these can be expensive. So, choose wisely and in a way consistent with your budget.

Hopefully you do not need to budget any money to the Debts category, but the option needs to be here in case you do. This category does not include credit card debt. This will be covered separately later. It also does not include debts on your house, which is included in the mortgage category, or debts on cars, which is included in the Transportation category. However, all debts besides these should be included here. Examples of what might be included are student loans, personal loans from friends and family, loans for buying that dream stereo system you probably shouldn’t have bought (Randy had one of these loans back in the day), and other similar debts.

The Personal category is for individual family member expenses. We suggest you have a separate category for each family member. In our case we have three personal expense categories: one for Randy, one for Kathy, and one for our son. If you have children that are attending a private school or a university, then you may also want to create yet another budget category named Education and allot money for it separately. Personal expenses include such things as clothes, haircuts, movies, concerts, etc. In other words, any expenses that relate back to personal needs and desires. Some people like to set up a separate Entertainment category for the entire family. That is perfectly fine, but we decided that we like holding each person accountable for their own entertainment expenses. If one person chooses to buy a lot of clothes, he or she may have to forego movies to compensate. If others buy a lot of video games, they may not be able to replace those tattered jeans.

The Miscellaneous category is there to cover any expenses that do not fit nicely into any of the other categories. If you find that you have a lot of expenses in this category, you may want to determine where most of that money is being spent and create more categories to cover those expenses separately.

The Savings category is where any unbudgeted money goes. Your goal is to have as much money as possible going into this budget item. If you are allotting so much money in the other categories that this category ends up having a negative cash flow, then you are in trouble. It will only be a matter of time before your lifestyle will become unsustainable due to having no money. If, however, you control your spending on the other budget categories, you should be able to have a positive cash flow in Savings. Then, over time, when you find that you have a significant amount of money in this category, you can transfer the excess to a higher interest rate account such as a savings account, a CD, or another investment. If you are eligible, you might want to invest in some IRAs so you can get a tax deduction. There are many ways to invest, so this topic will be covered separately.

As we said before, there may be some expense categories relevant to your family that we have never considered. If so, add that category to the ones you decided to use from above. Once you have set up all the expense categories that are right for you and your family, it will be time to determine how much of your household income to add to each of them. This can sometimes be difficult, but much of it can be determined by examining past expenses. But before we move on to allocating money, we need to discuss another category: Credit Cards. This is not really an expense category, but it is wise to include it for reasons you will see in the next post.

Sunday, September 25, 2011

Income > Outgo

It may seem overly simplistic, but the true essence of a home budget consists of controlling your spending such that it never exceeds the amount of money you have coming in. Take a counter-lesson from the federal government. They, as well as some state and local governments, have been spending more than they take in for many, many years. And just look at the mess it has gotten us into. You don’t want to find yourself in this same mire. You might be saying, “Too late, I’m already deep in debt.” Well, it’s not too late. Most people start out with some level of debt. If you are just out of college and working at your first “real” job, you may have college loans to repay. Also, you probably needed a vehicle to get to and from work and other important destinations such as the grocery store, the doctor, and the gym. Unless you found a good car for a great price, you may owe money on it. And at some point you may have decided to invest in a home, especially with the deflated prices due to the recession. But you may also have found yourself getting caught up in the I-want-it-now craze and went wild with your credit cards. Whatever debts you have incurred, it’s probably time to make a plan to reduce that debt and get your spending on a sustainable path.

One very simple way of handling a budget is to just have a checking account and make sure you don’t spend more than you have in it. Well, that’s a start, but it doesn’t really help you to understand where your money is going each month and to plan for those expenditures that only come around every few months or every year. What is really needed is a way to categorize your expenditures, decide how much money is needed for each category, and then budget accordingly. When you do this, you may see where some expenditures are just not wise given your current income. For instance, you may realize that those car payments are too high or that the cost of gas, insurance, and license fees were more than you anticipated. Under such circumstances, you may decide that you will take on a part time job to earn the additional money needed, or you may decide to sell the car and buy a much cheaper one that is still capable of getting you from point A to point B.

In our next blog post we will present to you some expense categories that we personally use in our home budget and suggest others that may be appropriate for your situation.

Cover Art

Friday, September 23, 2011


Before proceeding further, I need to provide this disclaimer.

The material presented on this blog is for informational purposes only. No guarantee can be made by the authors as to the effectiveness of implementing the suggestions provided. Everyone’s needs in budgeting vary. Therefore, the budgeting methods used by one person may not work as well or at all for another. What the authors can say is that the ideas presented herein have worked for them over the last 29 years. Should you decide to implement these ideas, hopefully they will work for you also.

Wednesday, September 14, 2011

All On Board

When one person is doing something for his own benefit and of his own accord, then he just simply has to decide he’s going to do it and stick to it. So, if you are a single person who has decided that you are mismanaging your money and are having a hard time bringing your spending habits under control, then the information presented here is for you. Following the advice we have laid out can help you get your spending under control. But you do have to make a commitment to lay out a reasonable budget and then FOLLOW IT. Those last two words are the key. FOLLOW IT! Just like any other decisions you might make in life to better yourself, they do no good if you wander off the path you have determined for yourself. If you need to diet to lose weight, then you can’t regularly binge on cookies and ice cream. If you need to lay off the alcohol because you have embarrassed yourself one too many times at “social” get-togethers, then you can’t drink a bottle of whiskey every day. Likewise, if you are spending money faster than your job is feeding it to you, something has to give. It’s time to lay out a plan and FOLLOW IT!

But what if you need to budget for a household? This can potentially be more of a challenge. One person in the household cannot simply decide to create a budget and then tell everyone else involved what to do. The others may not agree with how you have allocated the money. Hey, they may not even agree that a budget is even necessary. If everyone involved is not on board with the budget, then bad things can happen. We have heard of families where one spouse is trying to do the right thing in the way of budgeting, but the other spouse, not seeing the rationale behind it, just keeps on spending in the same way that caused the financial problems in the first place. Even worse, the not-on-board spouse may attempt to conceal his or her spending habits so as not to anger the on-board spouse. Of course, this cannot go on forever. But by the time the on-board spouse discovers the deception, the family budget may be in such dire straits as to take a much longer time to get it back on sound footing. So, it is very important for every relevant person to understand the importance and purpose of having a budget and to be totally on board with actually FOLLOWING IT. These people could be spouses or significant others, but can also include elderly parents living with you or even older children who have been given spending leeway, especially when this involves debit or credit cards.

In upcoming posts we will be explaining why it is important to create a home budget, how to create a budget, and then specifically how to implement it easily using spreadsheet software on a computer. But until you have completed the step just presented, getting everyone on board, then don’t even bother working on the these things. You can read the information so you can make your case for a budget, but setting one up without everyone else being on board will most likely be an exercise in futility.

Okay, so you say you have everyone on board? Good! Let’s get started.


Hello everybody and welcome to our new blog. Our names are Randy and Kathy Finch. Back when we got married over 29 years ago, Kathy said she wanted us to start a household budget. Randy was a bit skeptical at first since he had been managing his money as a single guy fairly well without a budget. Fortunately, she was insistent because she had heard that many of the marital problems couples faced were money related. She did not want us to ever have a conflict over money. She wanted us to create a budget and only make changes that we both agreed to. So, Randy finally gave his consent. In the early 1980’s computers were just beginning to make their way into people’s homes. They had very, very little power compared to today’s multi-gigahertz multi-core processors and were quite expensive. So, our initial attempt at a budget consisted of a ledger book, a calculator, and a pencil. It turned out that our concept of how to do a budget was very good, but the pencil and paper implementation was a chore. We can’t tell you how many times our numbers just didn’t match our bank statement. Finding errors in entries or mistaken calculations were a real pain. However, when we eventually did get to switch our budget to a computer, things really got better.

Over the coming weeks we are going to be passing on to you the knowledge and skills that we have garnered over the past 29 years of budgeting. We will also talk about how to set up an easy-to-use spreadsheet to maintain your budget. Even though we now use Microsoft Excel for budgeting, any spreadsheet software will do, even some of the popular free ones. Our first electronic budget was accomplished using Microsoft Multiplan on a Commodore 64 computer. Later we bought a Commodore Amiga computer and switched to a program named Analyze. Then when we bought a PC, we began using Quattro Pro. We finally settled on Excel since it ultimately ended up being the standard spreadsheet software used at our places of work. So, as you can see, home budgeting can be done with limited computer and software power.

We will try to update this blog at least once per week. We will start with the basics of budgeting and build up to using software to accomplish this task. We will also eventually share with you the spreadsheet that we currently use for our personal home budgeting. We think you will find it very easy to use.

Randy & Kathy

P.S. Check out Randy's new novel, "Passion is a Harsh Taskmaster." It's currently available as an eBook at Amazon, Barnes & Noble, Apple iBooks (via iBooks app), and Smashwords.