The Engineers Guide To Setting Up A Personal Budget

How to set up a personal budget for you and your family:

Setting up a personal budget, what daunting task, especially if you are starting from scratch.  While you may think that this is such an insurmountable task that you can’t ever be organized enough to figure it out… you are dead wrong.  While I am OCD about being organized, Money Savin’ Momma just can’t figure out what organization is or why a person would organize to begin with.  Honestly, if it were up to her, all of our dishes would live in a pile on the kitchen table.  Yet she is the one who originally setup our budget, so if she can do it… so can you.  Is it intimidating… yes. Is it impossible… well, NO!

No matter how you go about doing your budget remember these key points:

• Your budget is for YOUR BUDGET.  So no matter what examples you look at… you need to make it work for you and your situation.
• Your budget is not a do it once and forget it document.  It is a roadmap that guides you and shows you what you need to pay, when it’s due, what money you have coming in, how much extra you may have, etc.  It is a living document, meaning that it’s always changing.
• Your budget is, as mentioned, a living document.  You will always be updating it and making it better.  So, if you miss some things out to start off with or estimate the wrong amounts in setting things up… no worries… you will catch it all up as you go along.
• Your budget is your number one tool in your personal financial arsenal.  401k’s, APR’s, compound interest, black friday sales, coupons… it’s all good… but you NEED to know where your money is going to make sure at the end of the month… you still have enough money for next months rent (or mortgage payment).

So where do you start?

The first step is to start brainstorming.

Take a scratch pad and a pen and write down every expense you can think of that you have throughout the month.  Put down your rent/mortgage payment, insurance payments… all your payments, what you think you spend on groceries, gas, eating out, entertainment… everything you can think of.  Remember, I said brainstorm.

Okay, now that you have that much done, brainstorm some more on annual and semi-annual expenses.  Do you have to pay annual registration/taxes on your vehicles?  How about home or renters insurance? How about real estate or income taxes?  Basically anything that doesn’t happen monthly needs to be on paper too.

Remember, this is just brainstorming… preliminary… don’t get worked up about the dollar amount, just estimate to start.

Sample categories/categories we use:

• Mortgage payment
• House Insurance
• Car insurance
• Car registration
• Home taxes
• Income taxes (if applicable)
• Groceries
• Gas
• Vehicle expenses (maintenance and monthly payments)
• Utilities (gas, electric, phone, sewer, water, garbage, etc)
• Monthly Personal luxuries (cell phones, netflix, cable, etc)
• Entertainment (movies/eating out/whatever it is you do for fun)
• Credit Card payments
• Student loan payments
• Personal loan payments
• Clothing expenses
• Daycare/Childcare expenses
• Baby/Children expenses (diapers, formula, clothes, etc)
• This list goes on… this should at least give you some ideas.

The second step is to set up your budget method.

Everyone has their own preference as to how to do your actual budget.  Some people just make up a budget system that just allots so much money for each expense, some people do an ongoing budget and track their expenses real time and some people take that notion even further and forecast out a couple months ahead (or a year out in our case).  It’s more of a personal preference than anything.  I will say that the monthly allotment routine is less to keep up with, but you also a lot more short sighted on this plan.

I really like the real time tracking of expenses (I say real time, but it’s I’m usually a couple days behind… I can live with it). I like being able to forecast out a year at a time and seeing how overspending now makes me come up short in 7 months when I need 600 dollars to pay for the registration on the 2 cars. I also like being able to see real time my checking account balance, knowing that even though the bank slip says I have 1100 dollars, there is a 750 dollar payment scheduled to come out tomorrow AM, thus my real balance is only 350 dollars.  Like I said, it’s personal preference.

Popular Budgeting Methods:

The envelope or jar method: This is where you put x dollars into marked jars or envelopes, each representing the bill or money required for those items during the month.  So in reality you pay it forward ( this means you need to have a months expenses up front and not paycheck to paycheck).  In this method you fund your envelopes in the beginning of the month and then as you have bills or expenses, you withdraw from the jar/envelopes so that you know you only have X dollars for whatever category to spend and when it’s gone, it’s gone.  It works well as a visual reminder of your budget and what you have spent and what you have left. Being that you see the cash it tends to hit home harder than on paper.

The workbook method: This is where you leave the money in your bank, but setup and track your budget in a workbook.  This method forces you to stay on top of your checkbook and cash, but in reward it really tells you more about your finances as you track your expenses.  For me, writing down expenses really makes me feel accountable (and sometimes guilty) for spending money. You can go as basic as a paper notebook and pen or as fancy as some of the prepackaged budget workbooks out there.  If you are interested in a really good budget workbook that is easy to use I recommend the common sense money workbook.

The electronic spreadsheet method: This is like an electronic version of the workbook method.  The good part about this is it’s a lot easier to maintain.  If you are reading this I will assume you already have a PC and more than likely you already have some spreadsheet like excel. If you don’t and want a great free alternative that is compatible with excel, you can download OpenOffice from Sun Microsystems for FREE. This is the method we use.  Wifey originally set it up, it was easy and logical.  It is easy to use, we just keep a rolling bank register and show our monthly expenses.  Since it is electronic, running it out for a year ahead is just a matter of copy/paste and bam… all the expenses are run out.  Since all of our bills are due on the same day every month and most pay by autodraft, we just now that everything happens on those days.  I usually go back and put my paydays in on the exact dates and add the non-recurring payments like vehicle registration.  The really cool thing is you can see what your checking balance is at any given time a year out.  This way if we want to send an extra $100 for debt payment, we can see what impact it is going to have down the line and make sure it doesn’t put us into overdraft 3 months down the road. We put in all of our monthly expenses… insurance, loan payments, groceries, gas… everything.

The software based budget method: There are a ton of both online and installable programs to monitor and setup your budget, including MS money, Quicken, Peachtree, YNAB, Mvelopes and tons of others.  The problem I have with all of them is they cost money… and I feel like I can do as good a job with my free spreadsheet.  In this method you setup your budget software with all your info and budget costs, you setup and link in all of your accounts and let the software import all of your balances and transactions.  The interesting thing about these is that they take the guesswork out of keeping up your register.  There are some free ones out there, most of which I am NOT impressed with to say the least, plus remember… you need to feel really safe with them since you are linking your account info to them.  The exception to the free ones is the online budget program at www.mint.com, I have played with that site a fair amount and am decently impressed.  If I were to ever progress to a software based budget I would go the mint route.

The third step is to balance your budget:

Remember, in order to make ends meet, your outgoing has to be less than your incoming.  So add up all those budget items and make sure it is less than you bring home in a month.  If not, you need to see what you over-estimated or what you can cut back on/cut out.  I can’t really tell you how to do this, you really need to figure this part out on your own.  All I can tell you is that sometimes you find out that you spend a lot more than you thought… and sometimes difficult choices are required.

The fourth step is to stick with, maintain and follow your budget:

Your budget will do you no good if you put in minimal effort and file it away.  It needs to be a dynamic resource that you use as your guide to your money. Trust me… been there done that… when I say it will do you no good to file it under budget.  I am not saying to OCD obsess about your budget, I’m just saying that making out an honest budget and sticking with it is one of the best financial things you can do for yourself (and your family).

Hopefully you have some sense of what you want to get out of budgeting.  In the end, budgeting is like so many other things, you only get out of it what you put into it.  In the past I tried to do up a rough budget and never really followed through, so I felt like budgeting was a real waste of time.  But ever since we have been scrounging out every cent to pay off debt, the budget has been instrumental in knowing where we are spending all of out money, seeing where we can cut back on and knowing that we will have enough money to make it through till next payday.

Good luck with your budget!  All I can say is that if you put your heart into it, you won’t regret it.

-The Engineer

PS: If you need some good reading on budgets, I recommend this really simple book to get you started.

If you are trying you get yourself out of debt and re-engineer your personal finances, be sure to check out and read my Get Yourself Out Of Debt Series of articles!

*Note: This article is meant to be a general example of how one would budget and an explanation of how we budget.  I am not a certified financial planner nor am I a CPA, so this article should not be considered financial advice, but a general guide for inspiration.