I tracked our spending for years and mistakenly called it a budget. I categorized my bills and knew the precise amount spent each month and I could calculate the average amount spent each year. I could look back over the years and know how much we spent in each category, but that was the problem, I could only look back. A budget is really about looking forward, planning your spending, putting aside money for the things you know are coming and for the things you don’t know about too.
Back then my husband and I lived on rollercoaster credit. At the end of each month, once we paid all the bills, I would take what remained and pay towards the line of credit. It felt good, paying the loan down. But then there were months that the annual home insurance bill, car repairs, or holiday trips to visit family came up. These amounts were more than our monthly income could cover when you included the regular bills too. During those months I had to borrow again from our line of credit and so the merry-go-round continued.
Time to get off the merry-go-round
It wasn’t until I was about to go back to work after RU was born, that the cost of 3 kids in full-time daycare shocked me into questioning my budgeting methods. I realized we were about to launch into increasing debt. At least it would be short-lived, until the twins were in school. But in reality, with the cost of before-and-after-school day care, full-time school would only give us modest relief from the hit to our budget that was about to occur.
Something had to change. I wondered what I was doing wrong. Instead of beating myself up, I started to do some research and I uncovered three important things I had been missing for a successful budget.
- Put aside an equal monthly portion for the bills that don’t occur every month.
- Live on last month’s income.
- Save something for a rainy day.
Making a sound budget.
Thanks to my past tracking (see: What I Learned Tracking Our Spending) the difficult first steps of making a budget were already done. I could see what a year of spending looked like for us; I knew when the bills were due and how much they would be. I had just never prepared for them in advance before.
In order to make a good budget, look back at the whole year, account for every penny you spent. If you spent money for a new couch that you don’t foresee needing to buy again, split the amount into 12 anyway and put that amount in your monthly budget for other furniture. Maybe it won’t be another couch for years, but it could be for a bed or a table instead.
If you take all your annual spending and spread it out equally over 12 months, you might see that your monthly spending is more than your monthly income. This is where you can finally see if your budget fits your income.
Once you categorize all your spending for the last year, you might find you have lots of small, nit-picking categories, or you might have some inflated categories since you really aren’t going to replace your roof every year. Use your judgement to iron these out, lump smaller categories together, and trim back on ones that really were a once-in-a-lifetime event.
Now, using your judgement and experience about your spending habits, it is time to trim the budget to fit your income. Maybe you can’t afford to set aside enough to buy something like a new couch every year, so large furniture purchases may have to be every 3 years. Divide your furniture budget into 36 months and see if that smaller monthly amount fits. Keep going. Prioritize the categories that are important to you. The amount needed for a specific category, like a replacement couch, might seem insignificant in the budget and too small to be bothered with every month. It will slowly add up and when the children are older it will be really nice to have the money saved when it is time to replace the couch.
Living off last month’s income
Living off last month’s income means regularly putting enough money in your bank account so that you have a full month’s income in there before you start spending it. It means never worrying about your bank balance dipping below zero. It means if your income fluctuates, you can adjust for a low month with some pre-planning.
First of all, you must learn to live off your budgeted balance, not your bank balance. With this system, your bank balance may look big sometimes, and you may be tempted to spend it. Remember that is next month’s bill money accumulating and money for your annual bills collecting slowly.
I know, it’s hard to get there, but if you slowly put all extra money you can into a ‘reserved’ area in your budget, eventually you will have an amount equal to an average month’s income. So tighten your belt a notch for a short period until your budget categories have filled up. It’s worth it!
I’ll admit, I cheated, I figured out what our last month’s income was and borrowed it from the line-of-credit. But that was the last time I borrowed from the line of credit. It felt very strange at first to have a high bank balance, while I still owed money on the line of credit, but it was the single best thing I did for my stress level, my sanity, my marriage and my budget.
At first it was hard to not throw extra money at the line of credit every month and enjoy that short-lived-high of paying down our debt. But, the new rule allowed the line of credit to move only in one direction, down. It took months but the bank balance grew and the annual budgeted categories started filling up. It was discouraging that the line of credit didn’t get any smaller, but it also didn’t get any bigger.
Living off last month’s income left us with a fuller bank account, removed the risk of being overdrawn and allowed us to work with fluctuations in our income. Sometimes, my husband still gets fooled by the bigger bank balance. Then I remind him that we are approaching the time of year when our property taxes, our home insurance, and our car insurance all come due within a month of each other which is why the bank balance looks big and comfy. I encourage him to look at the budget, not the bank balance before deciding if we can afford something. An added bonus of a larger bank balance was that I no longer had to pay monthly fees to the bank. Cha ching!
Saving for emergencies
The other big lesson I learned to make ourselves budget healthy, was to save for a rainy day. We now have a small emergency fund and a home maintenance fund. I’m pretty strict about not stealing from it for things that do not fall in those categories and, I am strict about putting my budgeted amount in every month even though I really want to save for our next vacation faster.
Last winter when our furnace failed, I wasn’t wondering if I could afford to get the heat back on and keep my family warm, I knew I had money in our maintenance fund. When they told me the piece I needed wasn’t going to be cheap, I didn’t have to think about ‘where will we get the money?’ I paid the bill, I didn’t like seeing my maintenance fund drop so low, but I was sure happy it was there and I didn’t stress over shuffling money to make it happen.
I was finally living within my means, building budget categories that allowed for heavy or light spending each month. Once I set my budget categories, I began contributing any excess to the annual categories for the months I had not contributed. After that, I could finally put the excess into the loan repayment category.
Initially, I set the payments to the line-of-credit to a monthly amount that we could afford. Then any extra money that came to us in a month would also be put against the loan. This actually happened more often than I realized and the loan balance started to drop on a consistent basis.
Although the first six months were rough while our three-child-day-care bill gobbled up every cent we made, I learned to say no to every lunch invitation from my co-workers and every little unnecessary extra. We didn’t actually incur any more debt during that time like I thought we might, and, I came away with a better understanding of living with, and within, our budget.