Setting a budget

In a previous post I wrote about the mind-shift that happened in order for me to realize I needed a household budget. In this post I’ll detail a little about how my husband and I finally ended up setting (and following!) a budget.

There are many other web sites and resources for creating budgets, including just how much should be in each category. I can’t begin to compete with that level of advice, so just take this as one person’s way of coming to terms with the need for a budget.

1. For me, step one was having a goal, a reason for changing. In my experience, step one of any significant life change is a goal, or a wake-up call, or another mental shift of some kind. My reason for wanting to budget was partly the economy and partly the idea that I’d like to start a family. But the primary reason, the primary goal, was my and my husband’s desire to purchase a home. Serendipitously, the housing prices in Portland finally came down a bit, and the $8,000 tax credit enticed us to get our act together and buy a place. The time was right to change.

2. Next, I simply tracked where every dollar of our income was going for two months. We didn’t change anything about our spending, just looked to see where all the money went.

Yikes!

Talk about a wake-up call.

We were horrified to realize we were spending a significant amount each month going out to eat. It wasn’t because we were always meeting friends and otherwise creating experiences and good memories. No, we were just lazy.

On top of the expense of eating out, our grocery bills didn’t reflect much thoughtful spending either. We didn’t plan out menus and often just ran to the store multiple times a week when we needed something. In short, we could cut our entire food spending by more than half and still go out to eat once a week and enjoy nice food from the grocery store.

Other areas that surprised us were lunch expenses (we weren’t packing lunch) and coffee (we both bought fancy coffee everyday on our way to work.)

3. We immediately started to limit our spending. On the one hand, knowing we were working towards buying a house made this step easier.  On the other, it was still tough to change several years’ worth of habits. This has definitely taken some trial and error. We’ve learned which stores to shop at and plan our weekly menus out in advance–something we never did before.

We only go out to eat about once a week now, sometimes less. We’ve had shoes repaired rather than buy new ones, and we’ve looked at second hand stores before buying new.

4. I worked up a budget in a Google spreadsheet that we could share and both look at any time we wanted. Most of the categories are fixed expenses and therefore extremely easy to put into the budget.

As for the discretionary spending, I broke that down into categories too and we agreed on reasonable limits for each category. We increased the grocery budget a little tiny bit, and slashed the eating out category by 75%.

5. We determined what to do with the “extra” money we bring in every month. After taking care of all of our fixed expenses and allowing for the amount we agreed on for spending, we were pleasantly surprised to see that we bring in “extra” income. We were already contributing to retirement funds through work, so we were really looking at extra pay after retirement savings.

Deciding what to do with this money was the most powerful step towards change in the entire process.

At first, we put all that extra towards savings. This allowed us to save enough for a down payment for our condo.

After closing on the condo, we put all the “extra” in an emergency fund. (Yes, even after buying a home we have extra for other goals. This is one of the main reasons why we were so stubborn about how much to spend on a home.)

Now, we are paying off the last of our credit cards. Once those are paid off, we plan to increase our retirement contributions and continue saving money so that we have a great deal of financial flexibility when we start a family. I’d also like to set up multiple savings accounts to cover annual expenses like insurance premiums, car maintenance, Christmas, and vacations.

6. I combined all of our discretionary spending into one lump sum. For the sake of time and convenience, I don’t really care if we spend more on clothes some months, for example, as long as at the end of the month, the total amount spent on everything is in budget. If we begin to have problems controlling our spending, I will go back to individual categories. But for now, this is working really well and feels less restrictive.

The categories for our budget now look like this:

  • Mortgage (this includes PMI and property tax)
  • HOA fee (I’ll detail what this covers in a future post… it covers quite a lot.)
  • Utilities not covered in HOA (phone, electric)
  • Cable & internet
  • Insurance
  • Student loan
  • Monthly spending
  • Savings
  • Credit card debt

Do you have a household budget? What are your categories? How did you initially set your budget?

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