Budgeting, an often dreaded topic for families but a highly essential exercise in any family unit, business or venture. The concept is pretty simple:
- Know your expenses
- Know your income
- Compare the two
- Revise your expenses again in view of your current income
- (If applicable) Get another income stream
- (If applicable) Consider any potential longer-term savings element
Know your expenses
When talking about expenses, I like to break it down into three main categories for budgeting purposes:
- Living (day-to-day) expenses:
- Monthly (recurring) expenses
- Quarterly/Seasonal/Annual Payments
Living (day-to-day) Expenses
This category includes all those expenses that I typically encounter during any given month but are not necessarily fixed. For example, my utility bills would not fall in this category as those are known fixed monthly/quarterly bills and are part of the Monthly (Recurring) expenses.
I used the following line items:
- Children Expenses: This was primarily used when my daughter was a baby. Now, I use it as a ‘catch-all’ for other typical expenses that she puts me through that do not fall in the other line items. 🙂
- Cleaning Services: Services provided by the cleaning lady (depending on number of times she is needed)
- Car Expenses: This covers car fuel, repair/maintenance, contraventions and parking fees.
- Cleaning Products: This includes the purchase of laundry detergents, fabric conditioners, cleaning material, etc.
- Clothes: I always include a monthly budget for clothes (especially since my four-year old daughter goes through clothes sizes very quickly).
- Dining: Basically, if we are not eating at home, it goes here (dinners, drinks, etc..)
- Education: This includes education expenses that we have (e.g. class kitty, educational visit fees, etc.) – it does not include the education school fees since those are fixed and paid every semester.
- Groceries: This is a big one – this includes all expenses for items that we consume or use to prepare food (meat, vegetables, fruit, canned food, fish, cooking ingredients, etc…).
- Hardware/Tools: I do have a small budget for this as I am always fixing something around the house or breaking tools so I have to buy new ones. 😉
- Home Repair: This includes all expenses related to the above (excluding the tools) and typically end up including plumbing items, electrical items, etc.
- Household Items: This includes items that we buy and use or affix to the house (e.g. buying a new kitchen gadget, buying a new centerpiece for the sitting room, etc.).
- Medical Expenses: We had to increase this budget over time due to all the ‘nice things’ that my four-year old brings from school and shares with her friends – it’s a constant struggle to stay germ-free! The pediatrician knows we’re coming just from my daughter’s rhythmic pacing in the waiting room.
- Toiletries: This includes personal hygiene items that we buy (bath/shower gel, toothpaste, shampoo, deodorant roll-ons, etc…).
Obviously there are other expenses that I might have in any given month and I try to allocate them to the correct line item. There are cases when I have a one-off expense (e.g. unexpected wedding gift) – I do not budget for those anymore but you can have an ‘Unexpected Surprises’ line item for that.
Monthly (Recurring) expenses
I use this category to include known monthly (preferably fixed) recurring expenses. In my case, these are mainly:
- Utilities: TV, Internet, Phone (Other utilities are not paid monthly in my case)
- Loan Repayments: Any monthly loan repayments go here (Mortgage, Car Loan, etc.).
- Pension Plan: If you have one already. I prefer to pay mine monthly (smaller, more manageable amount).
- Monthly Allowances: We issue a monthly allowance to each other (me & my wife) from the ‘common pot’ and we are free to use it in any way we want. This is typically one of the line items that keeps shrinking over time when expenses get out of hand.
- Boss Savings Plan: This is the savings plan that I set up for my daughter – it’s growing nicely!
I use this category to include any expenses that are not paid on a monthly basis. Most of these are once or twice a year. Therefore, I include a line item for each payment instance.
- My Car Fees: Vehicle Licence & Insurance (paid in February)
- Wife’s Car Fees: Vehicle Licence & Insurance (paid in July)
- Wife’s Car Servicing: Typically once a year as vehicle is pretty new (around February)
- My Car’s Servicing: Typically once a year as vehicle is pretty new (around March)
- Health Insurance: Paid annually in June
- Life Insurance (Mortgage Loan): Paid annually in February
- Home Insurance (Mortgage Loan): Paid annually in January
- Personal Life Insurance (Additional): Paid in October
- Holiday Savings: OK. This is not really a payment. I try to plan for the holiday by putting a fixed amount to be paid out (used) annually on a specific period – e.g. Christmas
- School Fees: We pay the education school fees four times a year and I have therefore added 4 separate line items (one for each payment period)
- Electricity/Water bills: We pay these twice a year – therefore, two separate line items.
I’m impressed. You are still reading this! You are really committed to knowing your expenses! What do I do with all of the above?
I don’t keep track of all of this using pen and paper – I have been using GNUCash (since 2009) to track all our household expenses. It’s not a fancy online product but it does what it says on the label and, in certain parts of Europe, we do not have the easy integration with banks that we see in online US-based platforms.
Recording my expenses in GNUCash has now provided me 9+ years of historical information to analyse how our expenses have changed (the Boss keeps getting a bigger portion of that budget). However, even if you are just starting out, that’s OK.
I have added all of the above line items in GNUCash as Expense accounts mostly (I split them even further in certain cases). I have also used the Budgeting feature in GNUCash to map all of the above.
Then, start tracking those expenses – you can do it religiously (every single receipt) but being a Busy Human, you might round that up and track a bit more vaguely! It’s up to you as long as you are being true to yourselves with your actual expenses amount.
Using the Expense categories
You might be asking yourself: How do the above three expense categories fit with recording expenses? They do (indirectly) because there are two main activities here: Keeping a record of your expenses (day-to-day) and budgeting for them.
I include both living (day-to-day expenses) and monthly fixed (recurring) expenses in the budget on a monthly basis. Quarterly/Seasonal/Annual expenses is where it gets interesting.
I take Quarterly/Seasonal/Annual expenses and divide them over 12 (monthly) payments. I allocate the monthly payments to each month in the Budgeting year. However, this is not just a budgeting exercise. I have specifically created a bank account for allocating/saving this money on a monthly basis so that I do not get any surprises when the payment date is due.
You can only do that once you have finished the whole budgeting exercise and compared your income to your expenses. However, what are our ultimate goals
- To make sure that you are bringing in enough money to cover those expenses; and;
- To ensure that those monthly, quarterly, annual payments do not get in the way of living your life.
In the next post, I will switch over to the income side and go through some tips that I have gathered over time.
Thank you for reading!
– Busy Husband