My solution to a budgeting problem
Prior to coming up with the solution below, I found it difficult to know whether I was within budget for any given month. My problem was two-fold: (i) Credit card bills often contained job-related expenses that would eventually be reimbursed, and (ii) Occasional expenses like the annual property tax bill, a vacation or semi-annual insurance bills made it difficult to know whether I was under or over budget in any given month.
Let me start with a caveat: I am not an accountant. I have never used MS Money or Quicken. I dont even know if what I am about to show you is accurate from an accountants point of view. So, if you know of a better solution, please feel free to add your comments to this post.
Credit Card Bills
For purposes of my monthly budget, I ignore payments to credit card companies. Instead, on a daily basis, I log all credit and cash expenses in a small notebook. Then come month-end, expenses from the notebook are tallied and entered into a spreadsheet. Purchases via check do not go in the notebook. Rather, I include the checkbook register when it comes time to do the monthly budget.
Note: I track all expenses as they are incurred rather then when (credit card) bills are paid.
Occasional Expenses
Note: This section refers to the spreadsheet below.
1. My budget contains a section for occasional expenses (like property tax, vacation, insurance bills, etc.) noted by the light green background in the spreadsheet below.
2. Expenses tracked in this section are amortized across the entire year. In other words, the yearly projected amounts in this section are divided by 12, then automatically added to the spreadsheet as follows:
Note: For the following, refer to the yellow circle at bottom of spreadsheet.
- - A. = Projected Annual Amount for occasional expenses
- - B. = Average Monthly Budget Amount for occasional expenses
- - C. = Actual for Each Month for occasional expenses (this amount is NOT added to the total)
- - D. = Represents 1/12 of A, and is automatically calculated by the spreadsheet
3. Amounts in purple are actual expenses, but they are not added to monthly actuals (monthly actuals are 1/12 of the projected annual).
Note: Whenever an occasional expense changes, I update the annual amount. That way the totals reflect my actual total expenditures for the year.
Now it's easy to compare each month's total with the projected (average month), and know whether I'm still on track for the year.
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I solve the occasional expense problem in a slightly different way. Instead of looking at my total monthly expenses, I only look the subtotals for each of the categories I track to determine if my budget is in line. So in months where I have property tax due, my monthly total reflects reality, but I can see that the reason I was over budget that particular month was due to the taxes, and not because I ate out too much/bought too many extras. So I do ammortize the yearly payments (insurance, property tax, memberships, savings) over twelve months, but only when doing projections so that I know how much "misc" money I have to spend each month.
1stMill,
If you took your accounting example, and did two additional things, it would increase your control and reduce your management effort 10 fold. First is to take your concept of "averaging" and extend it beyond the month to month time frame. Make your tracking efforts a continious calculation through the year. The fixed budget amount you're striving to maintain month to month becomes a benchmark figure. Why? Well, because then the money you save by being under budget on any given month can be used the following months. Now for setp two: The easy way to account for this extra money you are tracking for all your expenses (without going into spreadsheet hell) is this: Open two checking accounts and use one for your fixed expenses and one for your flexible expenses. Long story short, while you keep your eyes on the steady deposits to these accounts which your spreadsheet is telling you to deposit based on your budget (total annual expense divided by 12)...you can really stay focused on the balances in your checkbook every month to easily determine if you are spending more than you have "accumulated" (an extension of budgeting using this method per the first step mentioned above). It may sound complicated but quite the contrary and there is to little space here to fully explain. To tell the truth I wrote all this stuff down in detail (because I found myself explaining it to inquiring minds to often). Check out http://www.thebword.com for a full explanation. Sorry, do not mean to spam here but its the best way to explain what I am talking about...thanks, Lee
